Endeavour Partners - Blog

Earlier this week I was in Oslo, giving a presentation on the future of the digital ecosystem on behalf of Innovation Norway. There is a huge shift in value underway, triggered by the advent of the app phone, and now extending across the whole of the digital ecosystem: communications, computing, consumer electronics and content. While this is creating lots of new opportunities, one of the key challenges facing any entrepreneurial venture is the clash amongst three titans – Google, Microsoft and Apple – all of whom have market caps north of $150 billion and see this as a death match.

Market capitalization of the three titans

There’s a great picture of the clash on DataViz today:

Clash of the Titans

One of my pet peeves is when people who should know better mis-spell Vodafone and Vodaphone. Shortening it to Voda is OK, but makes me think of the Star Wars Jedi Knight – and then the Weird Al song. Anyway, one of the things that makes competition in high-tech so interesting and challenging is that it is often not just ‘horizontal’.

Let me illustrate this with an example from DigiTimes this morning:

MediaTek and Vodafone have jointly announced that Vodafone has selected MediaTek chipsets for two new devices. The strategic partnership with MediaTek provides Vodafone with the opportunity to offer the Vodafone 340 camera phone at a very affordable price as well as its first entry level, low-cost touch screen device for prepaid customers – the Vodafone 541, Vodafone said.

Vodafone 541

This is one of eight Vodafone branded ‘phones launched today.

‘Horizontal’ competition is two similar businesses competing with one another for market share:

• Vodafone competing with FT-Orange in the UK
• Verizon competing with AT&T in the US

‘Vertical’ competition is when businesses compete for value capture, their share of the pie, rather than for market share amongst customers. Here Vodafone is partnering with MediaTek for chipsets, but effectively competing with other mobile phone vendors, such as Nokia, for some of the value created.

Competition can in fact be ‘diagonal’ or asymmetric, when it is amongst businesses that have fundamentally different scope of activities, or business models. Think Google giving away stuff free to generate ad revenue, competing with Microsoft’s packaged applications business.

Much of the competition in the mobile and broadband sector now takes this form; watch this space for more commentary…

There’s an item on CNET today asking why on earth Microsoft plans to offer Windows 7 Ultimate?

Now, not having been involved directly in this decision, it may be because Microsoft genuinely believes that its the right product for a small target group of customers:

“There is a small set of customers who want everything Windows 7 has to offer,” Ybarra said. “So, we will continue to have Windows 7 Ultimate edition to meet that specialized need.

“Windows 7 Ultimate edition is designed for PC enthusiasts who ‘want it all’ and customers who want the security features such as BitLocker found in Windows 7 Enterprise edition.”

There’s a better reason for an extreme version – extreme aversion. What? This extreme version will not just make a few über-geeks feel good, if they don’t think they’re being ripped off, but more importantly it will make those of us who don’t buy it feel better.

The reality is that customers making choices do not behave in line with rational expectations. One of the important cognitive biases that we have when it comes to making choices about which products to buy is that we tend to avoid extremes, and prefer intermediate choices.

Although other factors may play a part, it seems that the most powerful motivation for this is so-called loss aversion. We value things we have to give up more highly than things we might obtain, typically by a factor of between 2x and 4x. An extreme choice involves a large loss relative to the other extreme; an intermediate choice involves less loss than either extreme. That’s why there’s sometimes also a barebones version that very few people buy, to provide an extreme at the other end of the range.

So, Windows 7 Ultimate will make all of us who don’t buy it feel better.

The way in which customers really make choices amongst competing products has profound implications for product portfolio and pipeline management; these are explored more fully in a recent working paper: ‘Less is More’.

So, one of the most interesting questions about the smartphone marketplace is what will Microsoft do? WinMo is weak and late. OK, some the hardware is sexy, such as Sony Ericsson’s X1, but this won’t be enough to enable it to remain relevant in the face of the onslaught from Apple and RIM and Android. Possibilities abound:

• launch its own device?
• overhaul WinMo completely?
• buy a device company (HTC or Microsoft or Palm)?
• buy a platform players (Palm or RIM)?

Recent rumors suggest it may do its own device; and that this is what the Danger, Inc. team have been up to Microsoft Moves Office to JWT From McCann

There’s a lot of buzz about apps for smartphones. Not all apps are created equal, however, particularly when it comes to making money from them as a developer.

And that matters to platform players (Apple, RIM, Android, Nokia/Symbian/Ovi, MSFT/WinMo and Palm/WebOS) and device vendors (Apple, RIM, Nokia, Samsung, Sony Ericsson, LG, HTC and Motorola) because apps matter to consumers, and the choices that developers make will play a big part in which platforms win.

For the core apps like mail, messaging and browsing, their importance and economics means that platform players or device vendors have to deliver a great experience, they’ll be prepared to spend $/€ millions to do so, and they’ll give them away for free. That’ll make it difficult or impossible to compete against them. The world does not need another mobile browser company.

There’s a related category where other big businesses will also seek a presence on a platform, such as the iPhone, because of the payoff to their wider online or offline business, through for example increased brand awareness or reach. Think Amazon, Barnes & Noble or BA Flights (Yes, I’m a transatlantic bibliophile).

At the other end of the scale there will be a gazillion applets or widgets. It’ll be really hard to make money from these, because customers expect them to be free, and they’re often the fruit of individual developers scratching their own (sometimes idiosyncratic or even idiotic) itch. Maybe a little advertising money, but on a small screen, even a smartphone’s high resolution version, there’s a limited window for this. Perhaps if contextual information about who and where and what can be used, the value of a click-through can be raised, if privacy concerns can be addressed effectively.

In the middle, there seem to be two possibilities:

1. focused apps targeting a well-defined and stable job that people want to get done, and whose utility and usability is high enough that people will pay a few $/€ for them, but which are not so universal that they get bundled into the core and given away for free
2. infotainment apps, that can be renewed and replaced, fueling our insatiable appetite for amusement, such as games

There’s some really interesting analysis by ChubbyBrain (The iPhone Inspired 2nd Economy: Over $100 Million Goes from VCs to iPhone Startups) which estimates that $100 million in venture funding has already gone to iPhone apps insurgents in the middle of the spectrum. These are business for whom the apps are the core of their business rather than a complement to it, between established businesses that can fund iPhone app development themselves, and individual developers.

The three biggest categories, both by numbers of companies, and by amount invested:

• gaming and entertainment
• information provider
• social networking

Yup, it’s all about amusing ourselves.

Interestingly, this is also why the economics of video are so different from the economics of music.

With the dawn of the superphone, where is Microsoft? – FierceWireless

In a post on FierceWireless about smartphones (which he tags superphones), Stephen Drake poses the question that many of us are wondering about – what is Microsoft going to do?

It seems to me, however, that although it’s the right question, he’s missing the point, focusing on aesthetics and hardware, rather than on ease of use and software.

He characterizes these smartphones (or ’superphones’) as a:

“…high-end device class characterized by its ‘wow factor,’ a real or perceived buying frenzy, or an otherwise stylish, functional and pretty-to-look-at device…”.

While aesthetics matter, as hardware features, functions and form factor continue to be difficult but do not any longer differentiate, he completely misses the single most important factor: the user experience.

Talking about the Pre, he focuses on its: “…multi-touch capabilities and beautiful interface…”, hardware and aesthetics, when what matters about the Pre is WebOS. And the apps. Or lack of them.

When he comes to Microsoft, he asks where is “… the iconic, shiny device that users have coveted….” There are iconic, shiny devices: Sony Ericsson’s Xperia X1 for example, but WinMo just isn’t there.

Yes, aesthetics matter, but much less so than first ease of use, then the ecosystem (apps and content), both of which outweigh elegance.

Unless and until Microsoft can deliver the usability that customers are coming to expect from Apple, Android and Palm, it will remain uncompetitive.

Tragically, although this should have been apparent since before the launch of the iPhone, as Andy Lees put it at the announcement in Barcelona in February of the forthcoming 6.5 release:

“…[the user interface] seemed less important…”