James O'Neill's Blog

February 11, 2011

Elop and Ballmer : it’s the Ecosystem . Does everyone get it now ?

Filed under: Uncategorized — jamesone111 @ 6:07 pm

As the dust starts to settle after the announcement of the partnership between Microsoft and Nokia, the question has come from more than one quarter “what about the other handset vendors ?” 
There are 4 of them today. HTC has 4 phones out (the HD7, Mozart Trophy and Surround) with a 5th, the “Pro” due imminently; it makes more than a dozen Android devices. LG has one phone the Optimus 7 with a pro version in the pipeline, and according to Wikipedia makes 8 Android devices.  Samsung has the Omnia 7 and (if Wikipedia is to be believed) makes 9 Android devices. Dell is the last of the first wave Windows phone 7 manufacturers and it too has an Android device. Nokia is the first phone maker to go with Windows 7 who didn’t also go with Android. The initial “gang of four” can’t accuse Microsoft of infidelity when they had not been exclusive themselves,one must expect Microsoft to sell operating systems to all comers. The four also know that once they were eight: Garmin-Asus, HP, Toshiba and Sony-Ericsson were with them at launch. HP’s plans changed and the other three went quiet. Some drop out, some join, and so the world turns. I suspect their first thought is that if the decline in Nokia’s share comes to a halt, there will be less easy business to pick up.

You can watch the Stephen Elop and Steve Ballmer’s press conference here . Elop’s opening remarks echoed something from his burning platform memo: “The game has changed from a battle of devices to a war of ecosystems.”  Ecosystem was the word of the day*, I stopped counting the number of times it was used. It’s not about Nokia’s Windows Phone 7 device against, Dell’s, against HTCs against LG’s against Samsung’s. It’s about Microsoft’s ecosystem – with phones by Dell,HTC, LG, Nokia Samsung, and whoever else, against Google’s ecosystem with phones by Dell, HTC, LG, Samsung, Motorola, Sony-Ericsson, Old Uncle Tom Cobley and all, against the Apple and Blackberry ecosystems.

About 25:15 into the press conference someone asked Steve Ballmer about the other handset makers. He replies “The overall development of critical mass in Windows phone 7,  from other manufacturers, from the chipset community, is important to both of us – despite the fact that obviously Nokia wants to sell all the Windows phones it can”. Elop chimes in “This is an important thing for people to think about: Our number one priority is the success of the Windows Phone Ecosystem, in which Nokia is participating, so it is to our benefit to get that critical mass and virtuous cycle going which includes work done by  some of our handset competitors. We will encourage that, that’s a good thing. ”. We can’t prosper unless the ecosystem prospers. 

The next question Elop gets is “Why Microsoft not Android ?”  and his answer is interesting “What we assessed was 3 options…  internal: MeeGo Symbian and so-forth … the concerns about whether we could quickly enough develop a third ecosystem without the help of a partner like Microsoft … made that option concerning, absolutely concerning.” (Lovely way of putting it) “We explored the opportunity with the Google ecosystem … our fundamental belief is that we would have difficulties differentiating within that ecosystem – if we tipped over into the Android ecosystem, and there was a sense that was the dominant ecosystem at that point the commoditisation risk was very high, prices, profits everything being pushed down value being moved out to Google essentially. ”.

That begs a bunch of follow-up questions. “You don’t think you can build an ecosystem with MeeGo but HP think they can with WebOs  do you think they should be more … concerned ?”. “Is the Android handset market in a dash to the bottom or are you saying Nokia joining that market would have made it so ?”  “How will Nokia differentiate when Microsoft has worked to give consistent experience over all the Windows Phone 7 devices?”  “Why won’t  value will get moved out to Microsoft ? (Isn’t that the danger if you succeed and Microsoft’s becomes the dominant ecosystem ?)”
The financial question did get asked, and half answered, Nokia will pay Royalties on the OS, Microsoft will buy services from Nokia to strengthen the ecosystem. Who knows if Google would have offered them the  same ? Connections have little way to add value, the opportunities for the handset makers are reducing. Pushing stuff to the handsets is where the opportunity is today. I haven’t made a lot of purchases since I got my HTC trophy, but Microsoft take 30% of software sales from marketplace and if the margin Music is the same they’ve made £10 out of me in 3 months, that’s £80 over the two year life of a phone. I never had much idea what a Microsoft charged to put its software on a phone, (you can buy Windows 7 home Premium from a PC builder for £62 + VAT so Windows Mobile 6.x / Windows Phone 7 netting more than £80 doesn’t seem plausible). A year ago Microsoft made zero once a phone had been sold, now the revenue is reaching the point  where a token license fee is feasible – I can’t see Microsoft letting go completely.  And of course the biggest ecosystem by unit volume is an OS given away to sell advertising. You can see Nokia wanting to be in an ecosystem where it is not just as a handset maker.

 

* I nearly used “It’s the ecosystem stupid”, or “Our priorities are ecosystem, ecosystem, ecosystem” for a title.

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