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« Previewing Year 2012 in Smartphone Bloodbath - Year 3 is the Digital Jamboree | Main | So the Digital Jamboree starts: Q1 Results from RIM are horrid - Blackberry in tailspin »

March 30, 2012

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Tomi T Ahonen

To everyone on the comments, I am behind on responses, but please DO keep the comments coming. Brilliant stuff here. Brilliant. Obviously I will write follow-up blogs on this. Please do continue the debate and analysis and examples

Tomi Ahonen :-)

Michael Demetriou

There is another pattern here: Software, and more importantly user interface (usability and looks)

I haven't used a palm so I can't comment but if you look at the other cases the software was extremely outdated and cumbersome for the period just before the Cliff, compared to the competition.

Razr: Different layout than all other phones, illegible menus that took me, a phone junkie, a few minutes to find the alarm clock, awful localization (SMS in Greek went broken to the receiver, no lowercase Greek and awful translation for example)

Windows Mobile: The same since PocketPC2002, trying to adapt a desktop interface to mobile, refused to evolve and had stylus-oriented UX model and only supported resistive screens. WM had the same alarm clock bug (the alarm didn't sound unless you slightly changed the device time) through versions 2002, 2003, 2003SE,5. Vendors (HTC mainly) tried hard to create skins that made finger use easier (touchflo) which introduced inconsistencies. I was constantly facing the question from WM users, why do I have 2 contacts applications and what is the difference? LG branded phones had two main menus (WM native, and LG's touch friendly one)

Symbian: Symbian Belle may be up to standards but S60v5 of the late 2010 (just before the N8) combined with the underperforming N97 was cumbersome and inconsistent. While really stable the software had single click operation in some areas and doubleclick in others, kinetic scrolling in lists but not in the menu etc. Incremental software updates, pushed hastily to remedy the N97 failure didn't help either because they changed fundamental usability features of the phone alienating users. (Kinetic scrolling came in waves, first the browser, then the lists, then the menu etc). Multiple folder levels (installed apps showed 3 levels away from the home screen - Menu | Apps | My Stuff and dedalic settings system made everyday settings like brightness almost impossible to find.

Blackberry: I have not used a BB extensively but from a little time with it the user interface is just plain old. Even symbian looks cleaner and more modern, and gimmicks like the clickable touch screen didn't help either. Many reviewers say that the transition to touch screens at blackberry was not very successful, and as e-mail was made easy in other platforms too (it was a five step wizard to configure email in early windows mobiles and symbian phones, and required from the user to know what a POP3 and an IMAP4 is and if the server requires authentication and through which port) the main advantage of the blackberry for the non-youth vanished.

I think the same happened with Ericsson. Ericsson invented the Yes - No green/red buttons that everybody used until the iPhone. They decided to ditch it for a cumbersome system of a back button and clear (those where one button until then and in most phones) and almost fell off a cliff, just after the SonyEricsson joint venture.

Today, android started looking a bit cumbersome and old style and Google jumped in with Ice Cream Sandwich to force a unified style accross devices and a revamped UI.

F.OO

It's over, folks. Windows Phone is doomed.

The only thing that makes WP7 truly different -- the interface -- can be easily reproduced in Android, with a simple app:

http://www.youtube.com/watch?v=76ENoHqpD8g

The problem is not the app, per se, but how easy it is to mimic the biggest differentiating factor of WP7.

Why would someone buy a Nokia Windows Phone now?

vladkr

The cliff theory exist in other businesses too :

Air transport for instance : after 2001 most major airlines faced real cliff effects due to lack of passengers. That wasn't because of bad management, but the effect was still there. Some companies never recovered. Before that it took only couple of years for Pan Am to close to ground their planes for good.
How many airlines closed this year ?

Then, I also disagree that this effect doesn't exist with cars; Japanese auto makers faced a drop in sales last year because of the drop in production, itself caused by the earthquake in march.

Even if these automakers are climbing the cliff back, they still have faced it (I know for sure about Honda; although they have factories all over the world, they had big problems with deliveries in 2011).

So the cliff effect can have different origins - bad marketing, bad reputation, unsuccessful products, Natural/Economic disasters, etc. - but any business can face it : mobile communications, industry, services (remember Altavista, Hotbot...?)

don_afrim

Tomi, great article once again. I mostly agree that this effect is real but it doesn't really tell the whole picture.

Here is what I mean:

- The cliff only affected companies who didn't switch to Android

- If Palm would have made the switch to Android instaid of to windows and then webOS, it still would be around I'm sure.

- If Nokia would have switched to Android in February of 2011 with handset available the next day instaid of screwing around with maemo/meego and then switch to windows, it would still be the biggest handset maker in the world (i disagree with your strategy that keeping symbian and meego would have saved Nokia, it would have slowed the cliff, absolutely, but it wouldn't have saved them long term, no chance)

- Your analogy with manufacturer of phones and carriers and then manufacturers of tv's and tv channels makes no sense, it's like comparing apples and oranges. The tv industry also has "carriers", its your cable provider or satellite provider. If an analogy then you'd have to substitute the cable providers in there and take out the tv channels. But even that is not a good analogy. I think in this case, the phone industry is unique and can't be compared to any other industry out there.

- Nokia and Blackberry right now are like if HP and Dell decided to make all their pc's with Linux instaid of Windows 7 (and made sure there is no way you can officially install Windows), Tomi you see a cliff?? I see the Tomi cliff for both HP and Dell!!! hahaha (and no matter how hard BestBuy or Circuit City tried to sell you that nice Linux HP or Linux Dell- the Cliff is inevitable:)

- Same with Nokia and Blackberry, the carriers can't do anything the Market wants Android, the Market has chosen Android as the only "other" OS worthy of competing with Apple, any other OS is rubbish to the Market. Your analogy that carriers don't like Nokia is false to me (the US market maybe undesirable), because it's happening to Blackberry as well! Only because nobody want's a smartphone who runs on an "unpopular" OS just like nobody wants a pc who runs on Linux or Chrome OS. The damage is done for any other OS to survive.

- Nokia and Blackberry need switch to Android IMMEDIATELY and I mean as of yesterday. Drop everything and bring an Android handy. You know how cool you'd be with an Android Blackberry Torch! Or how massive the sales would be if you had a Nokia Lumia 900 with Android. Android is the answer, even if those companies need to sell their soul to Google, so have Dell and HP. Nokia can use Nokia Drive as a free app only on Nokia Android phones and all other phones would also have access through the Android Market but for a 100.- a pop fee!!(with all the Nokia patents and nokia drive they would make the most money on ANY android handy sold) Blackberry needs to make BBM standard on their Blackberry Androids phones and all other phones can get BBM in the market but for a 10.- fee!!! They'd immediately be huge App Developers!

Let me put it this way, if by year end we don't see some nice Android handys from either of these companies I guarantee you they won't be around by the summer of 2013.

tcb

The Cliff effect does exist elsewhere, but in the most unlikely of places, restaurant and nightclub business, which points in a curious direction if we want to track the root cause of the effect. My money is on a community/peer driven emotional relation to the phone brand itself.

@vladkr, google was the disruption that killed of altavista/hotbot/lycos/excite

tcb

@don_afrim


Blackberry is pretty much doomed since its killer app, the messaging, is now matched by other services. The brand has also taken a hit, previously reserved to corporations, now its used by inner city kids/lower middle class worldwide wanting to save on SMS fees.

That has totally destroyed it image as a business/corporate oriented brand. Corporations have mostly turned to iPhone.

And why would Nokia EVER switch to Android, when its got its own great linux based platform, MeGoo? Why would it make itself completely dependent on Google and left to its mercy (Microsoft deal is as rotten), when it can perfect its in-house OS perfectly optimized for use in its products, much like Apple does with iOS.

Henrik

@tcb: And why would Nokia EVER switch to Android, when its got its own great linux based platform, MeGoo?

Two words. Android Market.

From a phone OS perspective WebOS and Symbian aren't bad platforms. What made iPhone a success was in large part the availability of apps, not the OS in itself. Google clued in on that and created the Market. I think that is what made it a volume product, not the actual OS.

Tomi T Ahonen

Hi Paul, morgan and At

Paul - good comment about Dominant Design by Utterback. But if I remember correctly Dominant Design, we would need to have a 'superior' phone that had appeared that caused this collapse for these 6 cases. That didn't happen in at least 4 of the 6 cases. Only one that would fit well Dominant Design is Palm's death in hands of iPhone, there is clear opposite market development in the same period; and the two were clear close rivals in the same national market. Windows Mobile doesn't fit as nicely but does fit partially. But Siemens, Motorola (and currently Nokia and RIM) did not die due to any Dominant Design.

morgan - first, I love the numbers you quote, would that study about subsidy vs cycle be somewhere in the public domain, or at least summaries of it? I would love to read it, and I am not aware of it. There is very little public domain data on those issues.

About the percentage of smartphones being subsidised, that number was correct but it is no longer true. The current level of global smartphones subsidised is around 40% so its almost totally reversed from the number you've seen.

As to the crash in subsidised vs non-subsidised markets, my gut feeling says there is no strong correlation either way. But I have not explicitly tried to find that info on these six cases, I would love for someone to do that if anyone has that kind of curiosity and please drop a mention here on this thread so I know and can link to the blog.

At - good point, yes there is typical kind of large organization 'rot' that happens. That is not the case here. I ask you to find one example of any global industry outside of mobile handsets, where a Top 5 globally largest competitor suddenly collapsed so totally, it lost its customers in 3 years and died. I have tried and have not found any such examples. I've also engaged with my Twitterati today and none gave examples there either. If you can think of one, please post here. But just a company becoming inefficient and eventually dying, is not The Cliff effect, because their collapse is not sudden and total and irreversable.

Tomi Ahonen :-)

Tomi T Ahonen

Hi Afewgoodmen, Henrik and Manish

Afewgoodmen - Yes it really seems that way. And since I wrote the blog, based on comments here, I am now thinking this is a remarkably perilous industry, like walking on thin ice. If you fail, you crash through the ice into the freezing water (and die..). There is no room for (major) error.

Henrik - brilliant, truly brilliant comment and will be major theme of part 2 of this thinking. Yes, that replacement cycle dived below the development cycle, it made the industry prone to single failure causing a total collapse. The subsidy usually does not allow easy switching, though. So that part didn't seem very clear to me. On the loyalty factors, I think yes, consistency can also be an influence (positive or negative haha). On full cost vs subsidised, pls see earlier comment, I explained there is no difference.

Also your last point, that the handset manufacturer has given away power to operators/carriers who now wield exceptional power to help or hurt given handset brands, is spot on.

Manish - thanks for the link. Horace is always good

Tomi Ahonen :-)

anobserver

An insightful post!

Four remarks:

1) You have a conjecture, not yet a theory -- you lack a model for the fundamental cliff mechanism and hence cannot try to make any prediction.

2) The odd man out seems to be Ericsson / SonyEricsson. It was a major player, and fell from grace -- but it seems to have been a long decline rather than an abrupt drop. Or was it?

3) For another industry with _very_ abrupt cliff phenomena: pharmaceuticals. The cause: expiration of patents. This is mortal for the profitability and market share of pharma firms, and leads to the demise of those that do not have a diversified, very well balanced portfolio of products _and_ a full pipeline of promising products at different stages of development. Which brings us back to one of the remarks regarding Nokia and its portfolio of mobile phones.

4) If subsidies have an influence on replacement rates, then it means that the financing model (pay now, or pay in rates over time) should see similar effects in other industries. Do countries where cars are leased rather than bought have shorter replacement durations, for instance?

tcb

@ Henrik

But you have a flaw there, Nokia has no need for the Andorid Store (now renamed Gogle Play in an ominous reminiscence of all that ineffective Windows Live branding Microsoft has been doing for years). In fact the Ovi store was doing great, full of high quality apps, until Elob torpedoed the Symbian platform and gave all the Symbian developers one big "up yours" instead on working with them on a platform migration to MeGoo (like Apple did when it moved from Power PC to Intel).

The current long term Elob strategy is obviously to kill off the Nokia store, and leave Nokia without any contact with the developers.


Now isn't that just great for the boys in Redmond.

tcb

As I was saying, Nokia does not need the Android Market/Google Play thing... Ovi could have made more money than Amazon, a relative late comer in Apps ecosystems.

http://www.pcmag.com/article2/0,2817,2402443,00.asp


Amazon's decision to pursue its own app store appears to be paying off, according to Friday data from analysis firm Flurry.
Flurry examined a "basket of top apps" that were released for Apple's iOS, the Android Market/Play Store, and Amazon's own Appstore. The firm found that for every dollar spent on the iOS version of the app, 89 cents were spent on the app within the Amazon Appstore, but just 23 cents was spent on the Google Play version of the app.

cycnus

Tomi

You forgot 2 company that were also see the cliff, and you mention this a lot. Ratner (of ratner effect) and osborne (of osborne effect).

:)

kevin

Some thoughts:

1. As I've been saying, this cliff exposes the flaw of just focusing on units sold market share. Rising market share masks the rot that has already taken hold, so you can't see the disaster until it is too late. You have to also look at forward-looking indicators. Using other indicators, Nokia's and RIM's downfall could be clearly seen by an amateur (me) by summer 2010. Horace Dediu (asymco.com) has been tracking other indicators, and for a long time has been forecasting the outcomes we're seeing now.

2. iPhone is responsible, directly or indirectly, for the collapse of 5 of the 6 examples, and all the examples that occurred after 2007.
- iPhone set a new standard for a mainstream phone in 2007. The whole paradigm shifted and left Moto way behind.
- iPhone took the high end of every market it was sold in (and it has taken years before iPhone was sold by more than half of the carriers in most markets). In doing so, it forced previous high-end leaders to move down-market (i.e. lower ASP), where they soon had to compete against Android (which imitated the iPhone standard in concept), or compete against others within the Android sphere.
--- RIM's Verizon-backed BB failure against iPhone in late 2007 and 2008 led Verizon to spend over $100m to promote Android in late 2009. RIM was forced down-market by the US carriers, and to turn to international markets, where Apple and Android did not yet have as much mindshare, or as much of an ecosystem. Now that low-cost Android has arrived in those international markets, RIM has nowhere left to go (ASP has already dropped to around $250 from $368 in Feb 2009; $267m in BB7 phone inventory written off last quarter).
--- Palm tried to take iPhone head-on, with trash-talking and faking-out-iTunes, and releasing its new Pre a mere two weeks before a new iPhone. It got crushed.
--- Windows Mobile's failure to compete successfully against iPhone in late 2007 through 2009, and slow-mo development of WP7, pushed handset makers (like HTC and LG) to turn to Android.
- Using Android drastically reduces the ways a vendor can differentiate its products, and increases the impact of pricing. When low-cost vendors can also use the free Android, it makes supply chain mgmt and production costs even more critical. Due to this, Sony, HTC, Motorola, and LG cannot successfully recover from any mistakes in competing against Samsung, Huawei, and ZTE. It's already simple to forecast LG and HTC heading downward. I think Sony still has a slim opportunity to make something of Playstation. Moto will have Google financial backing so it may be able to take losses until Google gives it a ground-breaking innovation.

3. I agree that the short replacement cycle (which is often shorter than the development cycle) is a partial explanation.

4. The dealership and carrier relationship are also partial explanations. Apple transcended both. Apple went directly to the consumer, with its stores and marketing, thus bypassing the carriers. Then the carriers eventually needed iPhone as much as Apple needed the carriers.

5. The iPhone paradigm shift necessitated moving from a phone OS to a computer OS, and from being phone-hardware-centric to platform/ecosystem-software-centric. Google responded quickly, possibly because its CEO Schmidt was on Apple's board. RIM, Nokia, and Microsoft took way too long to recognize the shift; disparaging iPhone and then delaying development of a replacement OS or ecosystem. Palm also disparaged iPhone but soon responded, but it had other major handicaps.

6. Finally, this cliff effect in market share also happens in other industries, as others have noted. But it has been much more dramatic in mobile because the mobile market has much much greater revenue.

anobserver

@kevin

Good points about what happened from 2007 onwards, and the reasons for the demise of several players. However, I think you short-change Tomi.

"iPhone is responsible, directly or indirectly, for the collapse of 5 of the 6 examples, and all the examples that occurred after 2007."

Ericsson is something to check -- and it took place long before iPhone. Tomi might have the figures to determine whether it fits the cliff pattern or not. Another case is Benefon -- a very successful player in 1G NMT networks, but which crashed some years after 2G networks had become successful (yes, Benefon had several interesting 2G products and innovated with GPS functions).

"It's already simple to forecast LG and HTC heading downward."

All the more so since 2011 was definitely not a good year for HTC and LG. They have been heading down at least since 3Q-4Q2011.

"The iPhone paradigm shift necessitated moving from a phone OS to a computer OS"

Yes, this is the major evolution. We are dealing with a computing environment, and all pieces (phone, PC, cloud, software) are essential. Many of the players did not have them.

"But it has been much more dramatic in mobile"

It is more dramatic also because mobile phones are ubiquitous mass-market products.

Another industry where cliffs appear is banking. The phenomenon is called a bank run -- and interestingly, an impedance mismatch between customer switching times (short-term deposits that can be closed overnight) and product cycles (long-term loans such as mortgages) is the reason these bank runs are deadly. See Northern Rock in the UK. It takes literally just a few days to kill a large player.

Between mobile, pharmaceuticals and banking, everything points at that impedance mismatch between product development cycles and customer switching time to another product.

Notice that others have pointed out that once embedded in the Apple environment (with tablets, iPods, sync, iTunes, iCloud), it is fastidious and takes time to switch to another "ecosystem" (you have to replace several devices at once and software and reacquire content and reconfigure everything). So Tomi is indeed onto something.

em

anobserver: Banking is an excellent example. "The bank run" in mobile is probably a situation where your purchasing contracts and manufacturing capacity can not be scaled down with the falling demand.

The unit production numbers in mobile are very high, hundreds of millions for major players. It is just very hard or impossible to build and close factories for the components and devices within the handset replacement cycle.

Also, I think Samsung has been making losses in some quarters since 2000. Yet it has been able to adapt (a'la Darvin) and survive. Now Nokia is trying to do the same.

Darwinphish

Tomi:
Very interesting post. You hit on a number of key causes, but I believe you missed one. All the collapses you document occurred during the early stages of the market when it was experiencing phenomenal growth. The reason why you do not see similar collapses in other industries is that you did not go back far enough in their histories to similar periods in their markets' development. For example, if you go back 30 or so years and look at the PC market, you see lots of companies which fell off a cliff: Tandy/Radio Shack, Atari, Commodore, Osborne, et. al.

For a market to grow, it must keep bringing in new customers. Companies which experience early success do so because their products appeal to early adopters. However, early adopters often have much different needs and preferences than consumers who enter the market later. To attract new customers, sellers must offer something new. In a fast growing market, listening to your current customers and focusing on their needs will likely blind you to the needs of potential first time buyers, a group which is much, much larger than existing customers.

That is, market's experience growth BECAUSE new products are introduced. The smartphone market would be much smaller and would be growing much slower if the product options were still the same as the options 5 years ago. Motorola would still be selling a lot of flip phones, and would probably have great market share if messaging-centric devices did not expand the market so much. Similarly, media-centric devices brought a whole lot of buyers into the market who were never enticed by messaging-centric devices.

kevin

@anobserver: Tomi is great at delivering the numerical facts. I've learned an amazing amount from his sharing his knowledge on this blog over the past 5-6 years, and I use it to find quick comparisons of the mobile industry to other industries.

But I think he has two long-standing blind spots: 1. Nokia and 2. the real but often overlooked industry changes brought about by iPhone because Apple has had different objectives/strategies from the incumbents. For example, Tomi continues to tout SMS as a sales driver. SMS is certainly used by just about everyone, but it is not a differentiator between featurephones and smartphones, nor between different brands of smartphones (excepting the physical keyboard). Apps may not make many developers rich, and entertainment media may not be used by everyone on their phones, but both are very real differentiators used by consumers in choosing a smartphone.

My comment earlier about "all examples" only referred to the ones Tomi mentioned above.

S

I would agree to Paul Cosway about the design, just would add a few points: in mobile you can't wait to see what others do and copy them. That adds 18 months lag and just too much to survive. You have to guess, and if you ain't anywhere close to the right answer you die.

Then I wouldn't just name it "design". Its about features the phone has. Say if you create a phone today that would have perfect voice capabilities but won't have any sms support - you are just doomed. And btw, producing a phone that can't do filesharing or play mp3 or whatever else is just the right way to the cliff (note Windows Phone devices).

My guess is that it happened in each newborn industry and faded away as the rules became solid.

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