From Devices to Ecosystems

As computing has become cheaper and connectivity pervasive, the emphasis of our relationship with technology has changed. In the developed world, instead of optimizing technology purchases on the basis of cost, we now optimize them around use cases.

A well-known example is the transformation of the MP3 player market. As music went digital and Apple announced the iPod/iTunes combination, the conversation changed from features of a device to the way users could now experience digital content. Trying to compete in this market today by producing a “sleeker, faster, better” MP3 player is an exercise in futility.

Yet, many companies are still caught up in historic inertia and the need to hit short-term financial targets, so they continue to execute strategies fit for an industry with a horizontal instead of a vertical structure.

We read news about product launches that focus on improved features and device specifications: “More responsive! Thinner! New UI!” In the vast majority of cases, there is no mention at all of how the new device fits into a larger ecosystem, and how the use case is better than the competition’s.

For some of the larger players, time is running out – because the profit pools are migrating very quickly. Profits are moving away from devices and software and going towards applications, services and contents. These players need to embark in large-scale strategic actions to create or join winning ecosystems. The moves are very risky, but the alternative is being left isolated, losing market share and profits quarter after quarter until only a shadow of their former glory remains.

This is one of the key reasons behind recent large acquisitions like Microsoft-Skype, HP-Palm or Google-Motorola; they were all aimed at creating their own winning ecosystem. The biggest danger they face is underestimating the magnitude of the shift and not driving the changes and associated pain with pushing the center of gravity to where the new profit pools are going.

Nokia, for example, is in a very difficult transition. By jettisoning it’s own operating system and committing itself to Microsoft’s Windows Phone, it loses the ability to have its own ecosystem and joins Microsoft’s mobile ecosystem instead. The challenge is that this ecosystem is not vertically integrated – it follows the horizontal structure that was successful in the PC era, with multiple hardware vendors. This is a hard place to be for a company that is used to differentiating themselves on attributes other than hardware, price and go-to-market capabilities, because it can find its cost structure too high to compete against low-cost commodity providers, and its role in the ecosystem too restrictive to innovate and provide a differentiated user experience.

Sooner rather than later, I believe Microsoft will have to become vertically integrated in the mobile space, just like it did in gaming with the Xbox to compete with Sony and Nintendo. It will probably purchase a hardware provider – Nokia is the obvious choice – and exert more influence in its go-to-market model to deliver a more integrated, competitive user experience.

The relevant fight has shifted away from devices and moved towards use cases, with multiple, interrelated ecosystem wars as Apple, Google, Microsoft/Skype and Facebook fight the telephone providers to become your integrated communications platform; Amazon fights Wal-Mart to become your personal store for all purchases; Apple, Amazon and Google/YouTube fight with TV network providers to become your digital content provider (movies, video, music, etc.); and so on.

All these tectonic shifts in the industry create multiple opportunities and threats – most of which cannot be solved through operational execution, but need to be addressed at the strategic level. We saw a very clear example a few days ago with news from HP regarding its plan to discontinue operations for webOS devices and spin off the PC business. After a short-lived push to create its own ecosystem, HP seems to be following Nokia’s steps and giving up, in a sign that Apple’s ecosystem is by now too strong for them to engage in direct competition.

While strategic earthquakes continue rippling through the industry, remember to keep in constant focus not only the strategic plan for your company, but that of the ecosystem it belongs to; take needed actions sooner rather than later and be very wary of organizational inertia!


Comments ( 4 )

  • Jose Luis Lopez says:

    Now it is a matter of ecosystems. The layer of technology to solve people needs. No longer is related to products or features. Innovation now is making people live better, enjoy more, do more but easy. Nothing complicated.

    Very few, very powerful companies are the ones can create a successful ecosystem. Apple, Google, Amazon. Who is next? However, small business and StartUps can jump in to be part of one of those ecosystems. Blending people needs and technology is the recipe

    • rmoctezuma says:

      Well said, Jose Luis. These changes create a wealth of opportunities for small businesses and start-ups, however, they need to move very fast and have a good strategic perspective that must be reviewed often as the industry continues shifting.

  • alex souza says:

    Nice article Roberto. Interesting enough the webos platform is terrific but the size of APPLE and ANDROID ecosystems are not leaving any space for new players (regardless of their size being too big/HP or too small). In my view there is a critical inflexion point to identify the ideal size of those ecosystems that will continue to provide capabilities AND flexibility, otherwise they will become soo big that will prevent more innovations breakthroughts. In my view the power should remain w/ the users to decide what works best for them rather than having to decide for the ecosystems based on their sizes.
    Let’s have a couple of coffee some of those days and chat more about it,

    • rmoctezuma says:

      I agree, Alex, with your comment regarding critical mass. Ecosystems require a minimum critical mass to be able to sustain the players involved and draw attention from consumers. If you do not reach that critical mass at a certain point in time, it becomes extremely difficult (i.e. expensive and lengthy) to break in.

      Regarding maximum size, it is true that as ecosystems grow they tend to increase in complexity – which eventually becomes a problem. I believe one key element of the success of Apple’s ecosystem is that Apple has resisted the temptation to add too many features and attack small niche markets, thereby keeping the product line fairly simple.

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