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March 30, 2012

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Listed below are links to weblogs that reference The 'Cliff Theory' ie How Handset Makers Die, why in Mobile Phones do Companies Collapse so Rapidly (Siemens, Motorola, Palm, Nokia, Blackberry and Windows Mobile):

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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.

Baron95

One more time Tomi - stop making stuff up. Motorola never went bankrupt. And by the way they have not been sold to Google, yet. Though that will likely happen in 1H/2012.

What happened to Moto from 2006 to 2009 is that they were too reliant on feature phones and mostly a single model at that - the Razr. Once RIM, Apple etc came along with smartphones anad the RAZR fell out of the novelty factor sales predictably crashed.


Nokia, Siemens and Ericsson, were simply gifted a market advantage by the ITU/GSM cartel - it would never last. I'm shocked Nokia's run lasted as long as it did.

Phones now are computers. Not telecom "terminals". So Nokia, Siemens, Ericsson, Fujitsu, etc simply can no longer compete.

It is Silicon Valley's turn to rule.

Baron95

Now back to your main text, which is generally informative - thank you for posting.

If you re-read your "Cases" section, you notice what? That in virtually all cases (except Siemens) the decline started in 2007. Your examples show peak share for Moto, Palm, etc in 2006 then a steep decline to 2009.

Lets think back. What happened in 2007 in mobile....hummmm.....thinking.....oh yes, the second fruit-logoed phone was launched. Hint.

Baron95

As for your explanations of the cliff effect in mobile, I think you nailed several of the most important causes. Short replacement cycle, lots of choices, mostly sold side-by-side.

I think another industry that is somewhat like Mobile is the athletic shoe industry, where many brands fell off cliffs. Obviously Nike is akin to Apple, where they really made a shoe an aspirational brand with insane (up to that point) gross margins. The steep collapses of LA Gear and Reebok in the US were pretty epic as well.

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.

Riccardo Campaci

I think there is at least another industry where the "Cliff Theory" is valid too: fashion industry. For instance, this year everybody's going for "green" tones; next year: green will be out. For no apparent reason beside pure fashion market logic.

Mobile phones market have always included a strong fashion element; a bestseller mobile phone have always needed to be not only good but also cool, sexy or sleek. RAZR, StarTAC, iPhone, Galaxy S II, N95. That's because people likes to show their phones in public.

Fashion, style and design is a big part of mobile phones market, sometimes bigger than the features_part and this part is influencing customers perception too. There was a time when owning a Nokia phones was a cool thing; now is no more so.

tcb

@ Riccardo Campaci, your speaking of fashion design trends, but fashion brands are not as volatile, so its not a good example really. Major brands like Boss, Chanel, Gucci... have been around even before WWII, so its more like the car market, although new brands/designers can pop out, the old stay relevant, its a very structured industry.

Colin Crawford

The difference with the iPhone is it spawned a massive developer community and an eco-system where developers could make money. The consumers are loyal to the apps as much as the hardware. The rapid replacement cycle seem previously was because of weak bonds of loyalty - sure there was some brand loyalty but most of the time the lure of a better / cooler phone outweighed it. In the case of the modern smartphone market which was defined by Apple - apps are a central component. No longer is loyalty to a platform just because of hardware features - it's because of thousands of developers producing amazing games, services, information apps and so on. Of course Apple will have to continue to innovate the hardware and iOS - NFC, maybe 3D and support for AR, networked phones, more geo aware features etc. It's extremely hard to keep out in front with hardware alone - which is why the cliff effect has been seen before - Apple's been very smart giving developer the tools they need to develop awesome apps - that way the customer bonds are much tighter. So far no competitor has figured out how to compete with the Apple "platform" that covers hardware, software, the supply chain, developers and a extremely large number of very loyal consumers. Even if Apple does not have a majority market share of the handsets - it has overwhelming share of profits.

Louis

This is a really good discussion.

@tomi: Thanks for the post.

Somebody already linked to Michael Mace's blog post on the dynamics of how platforms die, but I want to endorse it as well. (Basically, a company gets really big and efficient at cranking out the same thing, and doesn't notice the basis of competition changed until after it can't afford the necessary capital investments to transition.)

@kevin: I agree with all of this. The iPhone changed the basis of what is the standard package, and everybody who didn't switch to the fast-following Android blew up.

One thing I want to throw out here is a slightly different take on the role of the operators. RIM always made much of its efficient use of data, but operators who had made hide 3G investments really needed to drive sales of expensive data plans. The iPhone arrived at just the right moment for this, which is probably why AT&T was happy to agree to Apple's terms: nobody really cared about their data plans before.

In other words, the operators were more prepared for a secular shift to data than the incumbent handset makers.

RG

I have one word for this thread:

apps

Repeated around 300,000 times, it invalidates most of the reasoning presented.

Brian Daly

I think of all the factors mentioned the most relevant is because mobile is a very young industry so there has been a string of disruptive hit phones. Because of the relatively long development times companies get left out in the cold. The iPhone experience is just superior. It's amazing what google pulled off with android. The companies with established brands and there own ecosystem faced the classic innovators dilemma, and couldn't respond quick enough.

The comment on early PC industry is illustrative (disappearance of Tandy, Atari, Osbourne). 

A bank run is not similar, it's an old old business, and the cliff effect is so extreme govt has to back it. It's driven by the fact that in a bank run, the earliest people to jump ship get the money, late actors lose everything. The mobile market is not like this.

One other comment: the two market leaders in mobile phones, Google and Apple moved in from other industries and brought huge resources to bear that are extremely hard, if not impossible, to replicate. This would point to Windows Phone as the most likely contender. Is it not incredible that Microsoft has floundered so badly?

Kai Lukoff

Brilliant piece, Tomi. I also re-read your 2007 piece on BI-AI iPhone, which reads as very far-sighted five years later!

I'd like to ask, could it be that fewer handset makers will fall off the cliff in the next 10 years? My commentary also echoes some of what @don_afrim says about the need to switch to Android, one of the two mobile OSs that consumers consider worth their money.

1) The iPhone era (AI) ushered in a new age in which the phone OS (software) has become more important than the hardware. In 2004, would I choose to buy a Nokia handset if it ran the RAZR's Symbian OS? Hell no, I want the RAZR's sharp-looking hardware, not its shitty OS. Today, would I buy a Nokia phone running iOS or Android? Yes, I just want the OS--the hardware is nice, but secondary. Players who missed this game change and got stuck on the wrong OS were/are sure to fall off the cliff.

2) As this OS era now stabilizes around iOS and Android (with Windows as a possible third player), I'd hypothesize that fewer handset makers will fall off the cliff. The 100,000s of hours app developers are spending to develop for iOS and Android give these OSs strong barriers to entry that previous ones never held. This greatly reduces a huge source of unpredictability for handset manufacturers: OS change.

That's an obvious point of stability for Apple. But also for manufacturers of Android handsets, they can now focus all of their energies on making great hardware, not guessing which OS to bet on or, even worse, building their own OS. There will still be some who choose Android and still lose (see: Motorola), but fewer will be eliminated because their OS can't hack it (see: Palm, and now maybe Blackberry and Nokia).

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    Tomi Ahonen is a bestselling author whose twelve books on mobile have already been referenced in over 100 books by his peers. Rated the most influential expert in mobile by Forbes in December 2011, Tomi speaks regularly at conferences doing about 20 public speakerships annually. With over 250 public speaking engagements, Tomi been seen by a cumulative audience of over 100,000 people on all six inhabited continents. The former Nokia executive has run a consulting practise on digital convergence, interactive media, engagement marketing, high tech and next generation mobile. Tomi is currently based out of Hong Kong but supports Fortune 500 sized companies across the globe. His reference client list includes Axiata, Bank of America, BBC, BNP Paribas, China Mobile, Emap, Ericsson, Google, Hewlett-Packard, HSBC, IBM, Intel, LG, MTS, Nokia, NTT DoCoMo, Ogilvy, Orange, RIM, Sanomamedia, Telenor, TeliaSonera, Three, Tigo, Vodafone, etc. To see his full bio and his books, visit www.tomiahonen.com Tomi Ahonen lectures at Oxford University's short courses on next generation mobile and digital convergence. Follow him on Twitter as @tomiahonen. Tomi also has a Facebook and Linked In page under his own name. He is available for consulting, speaking engagements and as expert witness, please write to tomi (at) tomiahonen (dot) com

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