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It’s Game Time for Nokia

When you think of Nokia, you probably think back to your first cellphone.  Or perhaps you think of Europe, where Nokia traditionally enjoys strong market share.  But do you think of smartphones?  No?  That’s not surprising, and the company is in the midst of a turnaround to ensure that it is top-of-mind for smartphone buyers worldwide.

Back in 2008, Nokia’s global smartphone market share was 39%.  Today, that market share has dwindled to 14%.  In the US, Nokia’s market share is practically nonexistent at 1.2%.  And this is all during a time when the size of the market has grown tremendously! The company went wrong when it failed to properly execute its smartphone strategy, focusing too much on its legacy platforms and not enough on next generation products.  When the smartphone boom hit, the company was ill prepared to capitalize on the opportunity and was left in the dust.

Nokia’s board finally acknowledged its predicament in September 2010 and hired a new CEO - Stephen Elop - to right the ship and refocus the company on the smartphone wars.  When Elop took the reigns of Nokia, he took stock of the company’s position within the market, current product mix and development prospects. The picture was not pretty. 

Nokia was known for making top-of the-line hardware.  This was great – a competitive advantage - but Elop realized that Nokia had to make a crucial decision around software, which was becoming an increasingly important part of the smartphone ecosystem.  At the time, Nokia was making smartphones, but it was using an old operating system that was originally designed to power feature phones and rudimentary smartphones.  It had a next generation smartphone operating system in development called MeeGo, but it would be years before it was ready for prime time.  In addition, the market was already crowded with competitors: Google’s Android, Apple’s iOS, RIM’s BlackBerry, and the recently re-introduced Microsoft Windows Phone platform were all vying for share.  Elop had to decide if Nokia should go it alone, align with one platform, or become a generic OEM like HTC and Samsung and design phones for multiple platforms.

In the end, Elop chose to go all-in with Microsoft.  While Windows Phone was just recently introduced and had a fledgling market share, Microsoft had the software chops to create and design a leading mobile operating system.  Further, it had the financial strength to make the required investment.  Nokia could bring the hardware, and Microsoft could bring the software.  Sure, Nokia could have gone with Android, but with Samsung, HTC, LG and others deeply entrenched in the Android ecosystem, competing head-to-head with the multiple low-cost manufacturers was unappealing.  And with RIM in a market share free-fall, a Nokia-Microsoft partnership had a fighting chance at third place behind Android and iOS. 

It helped that Nokia got special treatment at Microsoft.  While many details of the deal remain undisclosed, Microsoft is said to have committed $1bn in payments to Nokia to aid in the promotion and development of windows-based phones.  In addition, Nokia was promised deep-level development access to the operating system, a perk not afforded to other OEMs. Other details, including Microsoft’s agreement to license Nokia patents, were icing on the cake.

So what now?  The partnership is just starting to bear fruit.  On October 26, 2011, Nokia announced its first windows phone devices: the beautiful and elegant Lumia 800 and the budget-minded Lumia 710. But for those of you expecting to see the new Nokia devices on shelves soon, don’t start lining up just yet.  Nokia is planning a calculated and deliberate (read: slow) roll-out.  They’re starting with 6 European markets in mid-November, a handful of Asian markets before year-end and additional markets, including the US, in “early 2012.”

Why so slow?  Nokia is focusing first on the markets where it is already strong, launching in areas where it is most likely to be successful.  Selling smartphones typically requires the baking of wireless carriers, and coordinating these relationships and agreements on a global scale takes time. Finally, a calculated roll-out will also allow it to ramp up its manufacturing and supply chain and dynamically tweak its marketing messages. 

Despite the slow launch process, the largest bet Nokia has placed in recent history will play out over the next few quarters.  Will Nokia be triumphant and become a serious player within the smartphone market?  Will its devices capture the hearts, minds and wallets of US consumers?  Will the Nokia / Microsoft partnership launch Windows Phone to mass popularity?  Only time will tell.  Game on.  

“Should I buy insurance for my iPhone”: an analysis

Apple sells insurance for the iPhone 4S.  They don’t really call it insurance, they call it “AppleCare Plus,” but it is really an extended warranty plus insurance coverage.  Here are the details and subsequent analysis that will help you determine whether it is a good idea to purchase.  

The cost of the plan upfront is $100.  This extends your warranty for an additional year for malfunctions, but more importantly, it covers two accidental incidents.  The deductible for each incident, regardless of the incident, is $50.  By far the most frequent incident is a cracked screen.  Without insurance, apple charges $200 to fix a cracked screen.  The second most frequent incident is a cracked back (the back is made out of glass as well), but that only costs $30 to replace, so for this analysis, we will only focus on a cracked screen.

if you buy insurance

• if you drop your phone and crack the screen, you will come out $50 ahead ($100 initial cost + 50 deductible = $150, which is less than the $200 cost you would have to bear if you didn’t have insurance
• if you don’t drop the phone, then you lose $100 (the cost of the policy, which you never acted upon)

if you don’t buy the insurance

• if you drop the phone, you are out $200
• if you do not drop the phone, you do not lose any money at all

So your payouts look like:

• Insurance (break, no break): (+50, -100)
• No insurance(break, no break): (-200, 0)

Assuming there is a 50% chance of you dropping your phone, then the expected values are:

• Insurance: $-25
• No insurance: $-100

If there is a 20% chance of you dropping the phone, expected values are

• Insurance: $-70
• No insurance: $-40

the point at which you would be indifferent between buying the insurance and not buying the insurance: 28%

So, if you think there is a greater than 28% chance that you will accidentally crack the screen, then you should take the insurance.  if not, then you should decline AppleCare Plus.

This analysis ignores the second infraction…if you drop a second time, then benefits would be greater.  It also ignores the imbedded value in the fact that the insurance can be transferred to another party later on, should you decide to sell the phone on craigslist or ebay.

But you may be wondering what the accident rate is for the overall population.  I’ve been trying to find data, and I found the following based on the first four months of the iPhone 4 release, which shares the same design as the 4S (original link here: http://www.squaretrade.com/pages/iphone4-glass-study)

So basically the accident rate within a 12 month ownership period is projected to be around 15%, which is about half of the break-even point for the insurance.  But if you extrapolate this further over 24 months, you probably get closer to the break-even point.  Now, I’m sure that the actual accident rate is lower than the break-even point or Apple wouldn’t be offering this service (or competing services such as SquareTrade)….after all they’re in this game to make a profit.  But even if the break-even point is near the actual accident rate, Apple is still making money off you, since they are the ones doing the repair and obviously the parts and labor to replace the screen are under $200.

So, should you get the insurance?  If you are clumsy, then yes.  I would argue that even if you aren’t, it offers decent piece of mind.  There’a also some moral hazard involved with this:  if you get the insurance, you probably won’t feel the need to be as careful with your phone.  For example, you may opt to not get a case, so you can enjoy the full experience of the phone without the additional bulk.  For me, I’m not a huge fan of cases, so I’m leaning towards getting the plan.

Apple’s Secret Sauce

Apple Inc. is good at many things. Creating beautiful industrial designs, engineering technology into ever shrinking packages, and building ecosystems that support a suite of products are just few of its talents. But few people recognize one of Apple’s hidden strengths and source of tremendous competitive advantage: its supply chain.

When a new technology is created, the cost of manufacturing its components is typically very high, and manufacturing processes run at low yield levels. As a result, the economic feasibility of building a plant dedicated to this component is often compromised until efficiency rises and manufacturing costs fall. This partly explains why many breakthrough technologies such asflatscreen TV’s, blu-ray players and solid-state hard drives were initially available in such low numbers and at high prices.

It is suggested that Apple uses its market power, along with its mountain of cash ($76 billion as of Q3 2011), to tilt the technology supply chain in its favor. According to a well-publicized anonymous article posted on Quora, a question-and-answer site, Apple partners with suppliers of cutting-edge components and finances all or part of the factory costs required to manufacture the component. This cash infusion changes the investment dynamic for the manufacturer and allows it to economically supply Apple with the appropriate quantities of components.

In exchange for its investment, Apple gains two distinct advantages. The first is exclusive access to the component for a specified period of time.  This keeps the high technology component out of reach for Apple’s competitors and allows Apple to sell its product at the top of the market with less competition. All those times you’ve wondered, “The display on the iPhone 4 is amazing. Why can’t HTC or Samsung do this?” This is your answer.

The second benefit arrives when the exclusivity arrangement ends and the component becomes available to the larger marketplace. Apple has, as part of the terms of its original investment, negotiated discounted rates for the component to make up for the loss of exclusivity. The supplier can afford this because, over time, it has been able to increase manufacturing prowess and lower its costs. Further, because the likes of HTC, Samsung and Motorola are gaining access to the component for the first time, the supplier is able to obtain premium pricing from these new buyers. At this point, Apple enjoys a cost advantage to its competitors and benefits from either a larger profit margin (if it keeps product prices stable) or a higher market share (if it lowers product prices).

Recent industry reports appear to corroborate this type of supply-chain behavior. In May 2011, DigiTimes reported that Apple had made a large investment in 300 glass-cutting machines, which can be used to make curved glass screens for smartphones. Typically, Apple’s glass supplier, as opposed to Apple itself, would make this type of investment. But the reluctance of glassmakers to make the large capital expenditure apparently prompted Apple to purchase the machines on its own. One would imagine that Apple would demand some benefit in return, in the form of guaranteed supply, exclusivity, and/or advantageous pricing.

Granted, this could all be conjecture since Apple’s strategies and supplier agreements remain confidential. Further, much of this insight was gained from an anonymous posting on Quora. But given what we know about Apple products (key components tend to be one step ahead of the competition), the importance Apple places on operations (Tim Cook, former COO of Apple, has just been promoted to CEO) and what scraps of news we can find in industry publications, we can conclude that Apple’s supply chain is a key ingredient in its Secret Sauce.

(Source: sternopportunity.com)

Back in Business (school)

The summer is over (sad face), but that also means that I’m back to school (happy face) for the next year.  That also means that blogging is back!  This year I’ll also be a tech/digital media columnist for our school newspaper, the Oppy (http://www.sternopportunity.com/).  Any articles I write I will also post here in plain text, for all to enjoy.  I just wrote a piece for the most recent issue, so without further adieu: Apple’s Secret Sauce.

Another Hulu Idea

So I’ve come to realize that a lot of my posts a little long.  So I’m going to start adding a synopsis or the main point up front, and then let people click through for the full post.  This only applies if you are clicking from the main page.

Synopsis:

Hulu could become the consumer facing destination for all the cable operators’ TV Everywhere initiatives.   Consumers would, for example, access TIme Warner Cable’s on demand content through hulu.  One would simply go to hulu, type in their username/password from their cable account, and the system would make available whichever on demand shows are available through the cable subscription.  This solution plays to hulu’s strengths, and removes them from the role of the content licensor.  Hulu’s business model would be in the form of a recurring license or service fee , perhaps with some share of advertising revenue.  This would be good for cable companies, as creating web platforms are not their strong suit.  It is unlikely they would be able to create a platform as sophisticated and ubiquitous as hulu’s (including the ad serving backend).  Even if they could, the duplication of effort across each cable system to create its own on-demand platform is incredibly inefficient.  

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Nokia + Microsoft = win?

So there is a lot of talk about the newly announced partnership between Nokia and Microsoft.  I think it is a good idea, and here’s why.

A partnership with Microsoft is Nokia’s best option to become an immediate contender in the age of the smartphone.  Nokia isn’t doing so hot right now.  This has’t been a secret, and it has recently been confirmed by Nokia CEO Stephen Elop in an honest, no b.s. memo to employees.  Their main problem is software.  Nokia has fantastic hardware expertise, but over the last few years, it has been out innovated on the software side by the likes of Apple and Google.  While Apple and Google have been defining the modern smartphone, Nokia has been incrementally adding ho-hum features and updates to its antiquated Symbian smartphone operating system.  As a result, Nokia has essentially missed the smartphone boat.  As the world migrates from dumbphones to smartphones, Nokia is bleeding market share and losing time.  There is no hope for catching up with Symbian, so in order to participate in high-end smartphone market now, they need to adopt different software that is ready-to-go.  

If this is the case, what are Nokia’s options?  They could transition to Meego, a linux based OS they developed in partnership with Intel.  But that partnership appears to have stalled, and as a result Meego is still what I would consider in beta phase.  In addition, launching yet another mobile OS is a very risky, expensive endeavor in an already crowded marketplace (iOS, Android, WebOS, RIM, Windows Phone 7).  If Microsoft and HP are pouring resources into launching their platforms and still encountering strong headwinds, there is little hope that Nokia could single-handedly introduce its own new mobile OS.  Nokia could go with Android, but then it would be just another Android handset OEM with little differentiation and value add.  Not to mention that the Android handset market is already very crowded.  iOS, WebOS and RIM’s platform are all proprietary, so those aren’t options either.  

So where else to go?  Well there’s Windows Phone 7!  The OS is new enough that a strategic partnership between the two companies would mean that Nokia will likely have significant say in the development of the platform.  Given Nokia’s reach into the european market, its hardware capabilities and its patent portfolio, it will likely be granted deeper access than its competitors (LG, Samsung, etc) into the software, allowing it to add more value to the platform.  Plus, Microsoft is putting ton of resources (money and people) behind launching this platform.  If anyone can launch a new platform in the competitive mobile space, its Microsoft.  Also, its a pretty good platform!  Still a bit immature (see a few posts below), but a beautiful OS with tons of potential.  So with the software taken care of for the most part, and with the strong support and backing of Microsoft, the partnership with Windows Phone 7 seems like it could help pull Nokia out of its funk.

For Microsoft, the deal is a no brainer.  It has the software, but it needs people to build the hardware.  It is almost like the company has hit the jackpot with its partnership.  Nokia has a deep reach into the European market, it has strong brand loyalty (in Europe at least), and it is a superior hardware designer.  Microsoft, which makes a license fee from each copy of its mobile OS (not to mention other revenue perks along the way), wants to get its software on as many phones as possible.  And not just any phones, but high end, high quality phones that people want to buy.  They want a hardware partner that will lend legitimacy to their mobile OS.  Who better to do this with than Nokia?  

So Nokia has hardware know-how, but the company is lacking in the software department.  Microsoft is looking to push its shiny new software platform, but needs hardware partners.  It’s kind of like the two scrappy players at the game are getting together to form a true competitive threat.  It’ll be interesting to see how it all unfolds.

Comcast and Hulu, could be a good match!

Just throwing out an idea: why doesn’t comcast or some cable operator buy hulu? There was a WSJ article today that mentioned hulu was tossing around the idea of becoming more like a cable provider by offering live channels in addition to it’s traditional VOD capabilities. An existing cable operator could buy them and use this service to gain a national footprint without the costly investments of building out infrastructure to people’s house. This way I would be able to get a “hulu by comcast” cable subscription - completely digital - over my time warner cable connection. Or comcast could fold hulu into it’s existing VOD offerings to truly offer “TV everywhere”, on TVs, mobile devices, PCs, tablets in AND out of the home. Subscribers could sign up for this service, “comcast with hulu” with the hulu engine, ad platform, and UI driving the whole on demand experience. And the upside to users would be more content available on demand, as comcast uses it’s bargaining power and existing licenses to extend more content into the digital / VOD realm. Plus the seamless flow of time shifted, on demand content across devices is a win for users.

Netflix rocking the HBO boat

Netflix has recently indicated that it plans on trying to oubtid HBO for digital distribution rights to Warner Bros. films that are currently distributed via HBO in the “premium channel” window.  Regardless of whether Netflix wins, this is definitely a warning shot across the bow of HBO.  HBO’s position as a premium movie channel is becoming less defensible, and its ties to cable as the primary mode of distribution are providing competitors opportunities to craft their own “premium move channels” without requiring consumers to purchase a costly cable subscription.  

I think it is unlikely that Netflix will win the bid for Warner Bros. content when HBO’s contract comes up for renewal in 2014.  Warner Bros. and HBO are both owned by the same parent company, Time Warner, so essentially HBO can pay whatever it wants for this content without any net profit loss at the level of the parent company.  But by signaling its intent on aggressively bidding for this content, Netflix is opening the door to doing the same with content from other studios where HBO does not benefit from a privileged corporate relationship.  So when it comes time to renew an agreement with Paramount, for example, HBO may find itself in a difficult position, having to either match Netflix’s (presumably high) bid or lose content rights.

To a certain extent, HBO has realized this, as it has in recent years positioned itself as a premium, original content business as opposed to a pure “movie channel.”  More people have been buying HBO to gain access to shows like Entourage, Sex and the City, Sopranos, and Boardwalk Empire than they have to gain access to movies.  But movies are still a part of the core product offering, and as Netflix chips away at this, HBO’s competitive position certainly weakens.

In addition to potential content loss, a huge risk to HBO’s business is its reliance on cable tv as the sole distribution point.  HBO’s relationship with cable was born out of a time when cabe was really the only option for distribution - it was the only way to reach a vast number of households with video content.  At inception, HBO’s business model was radical and innovative.  But now things are different.  Advances in technology, proliferation of the internet and increases in bandwidth have spawned many other digital distribution avenues.  And on top of it, cable companies have been painfully slow to adapt.  It’s hard to be innovative when your partners resist change.  

HBO has a digital push in the form of HBO GO  which moves the company into the digital arena by providing much of its content over the internet to existing subscribers.  But HBO GO is not available to all subscribers (it depends on who your cable provider is and how far along your provider is in the adoption process) and the service doesn’t appear to be available on devices aside from PCs (no mobile, tablet, or “over the top” box support, for example).  Continued rollout and development of this product will certainly help, but in the long run, one has to seriously consider whether HBO’s singular relationship with cable is a sustainable one.

As Netflix continues to try and amass content, one has to wonder whether it is financially realistic and sustainable.  But if Netflix is successful, then it will essentially be reinventing itself as a premium movie channel that does not require a costly cable subscription.  This puts the competitive advantage of existing premium channels at risk and demonstrates the importance of exclusive content.

(Source: deadline.com)

Final Windows Phone 7 Impressions

So my experiment with Windows Phone 7 has ended, and I am off to my next mobile OS: Android.  I know, I’m a little late to the game, but the point has come in Android development and *cough* modding that I feel it is time to give it a go.  But first, I wanted to give my impressions of Windows Phone 7, and some reasons why I am moving on to try something new

Pros:

-Incredibly polished for a 1.0 operating system.  Almost all the basics are covered, and with a level of polish that Android and iOS did not have at launch.  I had no real meltdowns with the phone, and everything worked pretty much as advertised.

-Beautiful interface.  Everything was buttery smooth

-Love the information at-a-glance.  Super useful to have the next calendar appointment on the lock screen

Cons:

-3rd Party apps still janky (except for games), and generally small app ecosystem.  I had iphone envy seeing people with iphones test all these cool and innovative apps that I no longer had access to.

-I just wasn’t as productive on the phone.  I could still get everything done for the most part, but with the lack of multitasking and cut-and-paste, it made things like going from an email to the calendar to the email cumbersome, and downright painful at times.  If I was composing a text message, but wanted to add the address of an upcoming meeting, I would have to remember the address from the calendar app (no copy and paste), and upon returning to the SMS app, I would have to recompose the message.  ugh.

-I wasn’t able to put a micro SD card into the phone to expand the memory.  The slot was on the phone, but there was a risk, according to Microsoft and Samsung, that it wouldn’t work properly and possibly destroy the card.  I really missed the storage space.

Abbreviated blog post:  ESPN on the xbox 360 is amazing.  The interface is great, the content is great….its like a sports center where I can pick and choose what clips to see.  just awesome.  helooooo interactive TV