Mobile Opportunity - News And Views from Google MO

Okay, I’ll admit in advance that this is going to be a pretty snarky post, but it never ceases to amaze me how badly Nokia handles itself in the US market. In Europe and most of the rest of the world, Nokia operates like a fighter jet, incredibly nimble and powerful. But in the US, it’s more like a biplane. An old biplane. With holes in the wings. Nokia’s market share in the US has dropped from 20% to 7% in the last two years (link), and sometimes I wonder if it’s trying for 1%.

Case in point: Nokia’s “Open to Anything” ad campaign featuring people who have created software for Nokia N95 smartphones (link).

It features, swear to God, a guy who created a self-hypnosis application for the N95, someone who created a bad breath detector, a man in the Witness Protection Program who created a location-aware app to track the hit men chasing him, a ditzy woman who uses the phone to track fertilizer schedules for her plants, a jealous wife who created a lie detector, and a flake Jewish photographer who glued together two n95s to create a 3D camera.

“You’ve never really seen a bris until you’ve seen a bris in 3D.” –Nokia’s website

They’re all fantasy applications from obviously fake people, but beautifully animated in an elaborate Flash-driven site.

From time to time, I’ve talked with Nokia employees who were confused about why people don’t buy more application software for their Nokia S60 smartphones. There are a lot of reasons — lack of awareness that they can do it, lack of a built-in software store on the device, incompatibility between various versions of S60, etc. But one huge reason is because no one has ever made a compelling case to most users on why they should care about smartphone software.

The triumph of creativity over business sense

The Open to Anything campaign is a great example of how Nokia’s hurting itself in the applications business, and in the US market in general. I’m sure Nokia’s intent was to do something light-hearted to draw attention to the N95, and if you view the ads as standalone short films they are moderately witty. You see this a lot in online marketing lately — a creative agency will create humorous websites (often with video) designed to draw traffic from bored web surfers. But unless the ads also align with your strategy, they don’t drive sales. In Nokia’s case, they actually do harm:

–Once again, Nokia is communicating that its users are freaks and morons, which in the US is not the way to build a loyal following. Nokia has a long habit in the US of positioning itself as the preferred phone of people who lack social skills. At least this time there aren’t any sluts in the ad (link).

–The benefit of an open phone is not that you can write your own apps, it’s that you can buy applications created by others. Almost no one wants to create their own apps. So we’re being told that N95 users are not only freaks and morons, but they are freaks and morons who have programming skills — an even narrower demographic.

–Since the argument for why users should care about applications has not been made, showing a bunch of nonsensical applications actually makes people less likely to take an interest in mobile apps at all. It trivializes the whole idea of mobile software, at a time when Nokia claims it is trying to make itself into a computing company that can compete with Apple and Google.

Meanwhile, Apple’s ads depict its users as smart and hip, it puts its CEO on stage with real developers showing lustworthy iPhone applications, and it plans a built-in software store for the iPhone. Care to guess which platform is going to get more user and developer loyalty?

I’m tempted to start taking bets on when the iPhone application base will be larger than S60’s. Unless Nokia wises up quickly, it won’t take long.

Earlier today I told you about the survey of US iPhone users that Rubicon Consulting just conducted (link). When you publish a big study like this, there are always a few secondary data points that don’t fit into the whitepaper — kind of like outtakes in a movie.

I thought you might be interested in seeing the outtakes. So, here are some other interesting factoids about iPhone users…

How do you carry your iPhone?

To me, one of the most interesting findings of the study was that half of iPhone users are under age 30. I had expected them to be older, because PDA and smartphone users have traditionally been in their 30s and 40s.

With the younger age of iPhone users comes some other differences, including how they choose to carry their iPhones…

“How do you carry your iPhone?”

What was your primary motivation for buying an iPhone?

People usually have multiple reasons for buying a product, some of which they won’t even admit to themselves. But when we asked iPhone users why they bought the product, I found their answers to be refreshingly candid…

“When you obtained your iPhone, what was your number one motivation?”

The iPhone is a babe (or guy) magnet

One of the benefits of a popular new technology product is its ability to attract members of the opposite sex when displayed at a party or bar. We assumed that the iPhone would have such an effect, and more almost 70% of iPhone users agreed.

“Does the iPhone help you meet members of the opposite sex?”

Which websites do iPhone users visit?

In our whitepaper on the survey, we reported that most iPhone users say they browse on the iPhone a lot more than they did on their previous mobile device. But we didn’t have enough space to report which websites they visit on the iPhone most often…

“Which websites do you visit on your iPhone, and how often?”

I was very surprised that the new social communication service Spitr (link) didn’t make the list.

What other devices did the iPhone replace?

About a quarter of iPhone users said it is replacing use of a notebook computer. But given the enthusiasm of iPhone users, it’s not surprising that they are also using it to replace some other technology products:

“What else did the iPhone replace?”

What other features do you want in the iPhone?

In the whitepaper, we listed some of the most desired iPhone features. We didn’t have room to list other features that people also asked for. Here they are…

“What other features would you like to see added to the iPhone?”

Eight point scale: Strongly interested = 7 or 8, mildly interested = 5 or 6,
mildly disinterested = 3 or 4, strongly disinterested = 1 or 2.

Personally, I was disappointed that Strategic Conquest (link) wasn’t listed higher.

When and where do you use the iPhone?

An advantage of a mobile device is that it can go with you anywhere. This leads to some unusual usage patterns that the industry doesn’t like to acknowledge. I think it’s important to report them.

“When and where do you use your iPhone?”

So now you have the full picture of iPhone users. As you can imagine, these usage patterns are having a profound effect on the thinking and behavior of companies in the mobile industry. I think they probably had a lot to do with Google’s decision to buy Sprint (link).

I should add one other piece of information — as I said in my earlier post on the iPhone user study, the study is definitely not an April Fools joke. However, I can’t make that same assurance about the post you’re reading now.

I think it’s safe to say that the iPhone is the most publicized new mobile product of the last several years, especially in the United States. But although there has been endless commentary on the iPhone, there hasn’t been much solid data on how it’s being used, and what impact it’s having on the industry.

At Rubicon, we set out to fix that by conducting a quantitative study of US iPhone users last month. We released the results today at CTIA. You can read the full results on the Rubicon website (link). Here are a few highlights:

–iPhone users we surveyed are very satisfied overall with the product, and report that they’re making heavy use of features like e-mail and browsing. This is driving higher mobile phone bills, producing about $2 billion a year in additional revenue for AT&T.

–Users are not universally satisfied with everything about the device — about 40% report that it can’t display all the websites they want to visit, and many also said they would like to see physical changes to the product, such as the addition of a bigger screen or a thumb keyboard.

–Users are young Apple veterans. Half of US iPhone users are under 30, and 75% are prior Apple customers.

–The iPhone is expanding the smartphone market. About 50% of iPhone users replaced conventional mobile phones, while 40% replaced other smartphones. The Motorola Razr was the conventional phone most often replaced, while Microsoft Windows Mobile devices and the RIM Blackberry were the smartphones most often replaced.

–Email is the #1 function. The most used data function on the iPhone is reading (but not writing) email, with about 70% of users doing that at least once a day. About 60% said they browse the web on the iPhone daily.

–The iPhone increases mobile browsing. Over 75% of iPhone users say they do a lot more mobile browsing on it than they did with their previous mobile phone.

–The iPhone drives carrier switching. About half of iPhone users switched carriers to AT&T when they obtained the iPhone.

Please note that although I usually post an April Fool’s message today, this ain’t it. The timing at CTIA made today the best day to release the study. It’s completely genuine.

I have time tonight for only a quick note on Apple’s iPhone software developer kit announcement. Overall, it is deeply impressive how many things Apple got right. We still need to see more details on terms and conditions, and a lot will depend on Apple’s execution, but here are the problems they appear to have solved:

–Mobile applications are hard for users to find and install, so Apple is building the applications store into every device. Apps are installed automatically when you buy them, and you can also be notified of upgrades when they’re available.

–Third party applications stores take far too much of a developer’s revenue — 60% or more. So the Apple store takes 30%. That’s a bit high (20% would be better), but everyone else has been so greedy that Apple looks like a charity.

–Getting applications certified for use on mobiles is expensive and time-consuming, so Apple has streamlined the process dramatically. Developers pay $99 a year, and apparently get automatic certification of all their apps. We need to learn more about how the app approval process will work, but if it’s not burdensome this service alone justifies Apple’s 30% cut of revenue. Apple takes responsibility for ensuring that iPhones remain secure and do not abuse the network, something that no one else has been willing to do.

–Developers want to get access to the features of the phone, so Apple has exposed a very rich API set including access to the accelerometer and other special features of the iPhone. This is not a sandbox; it looks like it’s access to pretty much the whole OS.

–And oh by the way, Kleiner Perkins is creating a $100 venture million fund for iPhone developers. Makes Google’s $10m contest for Android developers look like a popgun.

It has been obvious for at least six years that all of these changes were needed in the mobile market, but until now no one in the US and Europe has had the courage / political muscle / intelligence to carry them all out. The other mobile platforms now look pretty pathetic by comparison — not so much because their technologies are bad, but because their business infrastructure is so primitive.

At the announcement today, John Doerr called this Apple’s third platform, which has a very specific meaning in Silicon Valley. It means they’re planning to drive rapid growth in apps, which will make the iPhone more attractive to customers, which will in turn attract more developers, bringing in even more users, and so on in a virtuous circle.

I don’t know how far Apple can drive that, just because their sales are so small compared to the total number of phones out there. I still think it’s likely that web apps will eventually displace most native mobile apps, because the addressable market will be so much larger. But eventually can take a long time, and if anyone can buck the trend it’ll be Apple. They have created by far the best overall proposition for mobile developers on any platform in the US or Europe, and I hope they’ll do very well for a long time.

Apple is challenging the rest of the mobile industry to compete on its terms. It will be very interesting to see how the other mobile vendors react, Nokia and Microsoft in particular. Nokia seems to be focused on a strategic positioning activity around seeing who can collect the most runtimes, while Apple is solving real developer and user problems. It’s a striking contrast.

The rest of the industry is still trying to figure out how to respond to the system design of the iPhone, and now they need to also figure out how to run an ecosystem as well. Right now Apple is changing the terms of the competition faster than the other guys can react, which is exactly the right way to beat a group of larger competitors.

Summary: The business of making native apps for mobile devices is dying, crushed by a fragmented market and restrictive business practices. The problems are so bad that the mobile web, despite its many technical drawbacks, is now a better way to deliver new functionality to mobiles. I think this will drive a rapid rise in mobile web development, largely replacing the mobile app business. This has huge implications for mobile operators, handset companies, developers, and users.

The decline of the mobile software industry

Mobile computing is different from PC computing.

For the last decade, that has been the fundamental rule of the mobile data industry. It was the central insight of Palm Computing’s “Zen of Palm” philosophy. Psion came up with similar ideas, and you can hear echoes of them from every other successful mobile computing firm: Mobile computers are used differently from PCs, and therefore must be designed differently.

We all assumed this also meant mobile devices needed a whole mobile-specific software stack, including an operating system and APIs designed specifically for mobility, and native third-party applications created from the ground up for mobile usage.

That’s what we all believe, but I’m starting to think we got it wrong.

Back in 1999 when I joined Palm, it seemed we had the whole mobile ecosystem nailed. The market was literally exploding, with the installed base of devices doubling every year, and an incredible range of creative and useful software popping up all over. In a 22-month period, the number of registered Palm developers increased from 3,000 to over 130,000. The PalmSource conference was swamped, with people spilling out into the halls, and David Pogue took center stage at the close of the conference to tell us how brilliant we all were.

It felt like we were at the leading edge of a revolution, but in hindsight it was more like the high water mark of a flash flood. In the years that followed, the energy and momentum gradually drained out of the mobile applications market.

The problem wasn’t just limited to Palm; the level of developer activity and creativity that we saw in the glory days of Palm OS hasn’t reappeared on any mobile platform since. In fact, as the market shifted from handhelds to smartphones, the situation for mobile app developers has become substantially worse.

That came home to me very forcefully a few days ago, when I got a call from Elia Freedman. Elia is CEO of Infinity Softworks, which makes vertical market software for mobile devices (tasks like real estate valuation and financial services). He was one of the leaders of the Palm software market, with a ten year history in mobile applications.

I eventually moved on from Palm, and Elia branched out into other platforms such as Blackberry. But we’ve kept in touch, and so he called recently to tell me that he had given up on his mobile applications business.

Elia gave me a long explanation of why. I can’t reproduce it word for word (I couldn’t write that fast), but I’ve summarized it with his permission here:

Two problems have caused a decline the mobile apps business over the last few years. First, the business has become tougher technologically. Second, marketing and sales have also become harder.

From the technical perspective, there are a couple of big issues. One is the proliferation of operating systems. Back in the late 1990s there were two platforms we had to worry about, Pocket PC and Palm OS. Symbian was there too, but it was in Europe and few people here were paying attention. Now there are at least ten platforms. Microsoft alone has several — two versions of Windows Mobile, Tablet PC, and so on. [Elia didn’t mention it, but the fragmentation of Java makes this situation even worse.]

I call it three million platforms with a hundred users each (link).

The second technical issue is certification. The walls are being formed around devices in ways they never were before. Now I have to certify with both the OS and with each carrier, and it costs me thousands of dollars. So my costs are through the roof. On top of that, the adoption rate of mobile applications has gone down. So I have to pay more to sell less.

Then there’s marketing. Here too there are two issues. The first is vertical marketing. Few mobile devices align with verticals, which makes it hard for a vertical application developer like us to partner with any particular device. For example, Palm even at its height had no more than 20% of real estate agents. To cover our development costs on 20% of target customer base, I had to charge more than the customers could pay. So I was forced to make my application work on more platforms, which pushed me back into the million platforms problem.

The other marketing problem is the disappearance of horizontal distribution. You used to have some resellers and free software sites on the web that promoted mobile shareware and commercial products at low or no charge. You could also work through the hardware vendors to get to customers. We were masters of this; at one point we were bundled on 85% of mobile computing devices. We had retail distribution too.

None of those avenues are available any more. Retail has gone away. The online resellers have gone from taking 20% of our revenue to taking 50-70%. The other day I went looking for the freeware sites where we used to promote, and they have disappeared. Hardware bundling has ended because carriers took that over and made it impossible for us to get on the device. Palm used to have a bonus CD and a flyer that they put in the box, where we could get promoted. The carriers shut down both of those. They do not care about vertical apps. It feels like they don’t want any apps at all.

You can read more of Elia’s commentary on his weblog (link).

Add it all up, and Elia can’t make money in mobile applications any more. As he told me, “Mike, it’s time for you to write the obituary for mobile apps.” More on that later.

Although it’s a very sad situation, if Elia’s experience were an isolated story I’d probably just chalk it up to bad luck on the part of a single developer. But it mirrors what I’ve been hearing from a lot of mobile app developers on a lot of different operating systems for some time now. The combination of splintering platforms, shrinking distribution channels, and rising costs is making it harder and harder for a mobile application developer to succeed. Rather than getting better, the situation is getting worse.

I’ve always had faith that eventually we would solve these problems. We’d get the right OS vendor paired with a handset maker who understood the situation and an operator who was willing to give up some control, and a mobile platform would take off again. Maybe not Palm OS, but on somebody’s platform we’d get it all right.

I don’t believe that any more. I think it’s too late.

The mistake we made

We told ourselves that the fundamental rule of our business was: Mobile is different. But we lost sight of an even more fundamental law that applies to any computing platform:

A platform that is technically flawed but has a good business model will always beat a platform that is elegant but has a poor business model.

Windows is the best example of inelegant tech paired with the right business model, but it has happened over and over again in the history of the tech world.

In the mobile world, what have we done? We created a series of elegant technology platforms optimized just for mobile computing. We figured out how to extend battery life, start up the system instantly, conserve precious wireless bandwidth, synchronize to computers all over the planet, and optimize the display of data on a tiny screen.

But we never figured out how to help developers make money. In fact, we paired our elegant platforms with a developer business model so deeply broken that it would take many years, and enormous political battles throughout the industry, to fix it — if it can ever be fixed at all.

Meanwhile, there is now an alternative platform for mobile developers. It’s horribly flawed technically, not at all optimized for mobile usage, and in fact was designed for a completely different form of computing. It would be hard to create a computing architecture more inappropriate for use over a cellular data network. But it has a business model that sweeps away all of the barriers in the mobile market. Mobile developers are starting to switch to it, a trickle that is soon going to grow. And this time I think the flash flood will last.

If you haven’t figured it out yet, I’m talking about the Web. I think Web applications are going to destroy most native app development for mobiles. Not because the Web is a better technology for mobile, but because it has a better business model.

Think about it: If you’re creating a website, you don’t have to get permission from a carrier. You don’t have to get anything certified by anyone. You don’t have to beg for placement on the deck, and you don’t have to pay half your revenue to a reseller. In fact, the operator, handset vendor, and OS vendor probably won’t even be aware that you exist. It’ll just be you and the user, communicating directly.

Until recently, a couple of barriers prevented this from working. The first was the absence of flat-rate data plans. They have been around for a while in the US, but in Europe they are only now appearing. Before flat-rate, users were very fearful of exploring the mobile web because they risked ending up with a thousand-Euro mobile bill. That fear is now receding. The second barrier was the extremely bad quality of mobile browsers. Many of them still stink, but the high quality of Apple’s iPhone browser, coupled with Nokia’s licensing of WebKit, points to a future in which most mobile browsers will be reasonably feature-complete. The market will force this — mobile companies how have to ship a full browser in order to keep up with Apple, and operators have to give full access to it.

There are still huge problems with web apps on mobile, of course. Mobile web apps don’t work when you’re out of coverage, they’re slow due to network latency, and they do not make efficient use of the wireless network. But I believe it will be easier to resolve or live with these technical drawbacks in the next few years than it will be to fix the fundamental structural and business problems in the native mobile app market.

In other words, app development on the mobile web sucks less than the alternative.

Here’s a chart to help explain the situation. Imagine that we’re giving a numerical score to a platform, rating its attractiveness to developers. Attractiveness is defined as the technical elegance of the platform multiplied by how easy it is for developers to make money from it. The attractiveness score for native mobile app development looks like this over time:

This is why mobile app developers are in trouble. Even though the base of smartphones has been growing, and the platforms themselves have become more powerful, the market barriers have been growing even faster. So attractiveness has been dropping.

Now add in mobile web development:

Based on what I’m hearing from mobile developers, the lines just crossed. The business advantages of mobile web development outweigh its technical limitations. More importantly, if you look at where the lines are going, the advantage of mobile web is going to grow rapidly in the future.

I’m not saying all native mobile development is dead. In fact, we’re about to see the release of Apple’s native development tools for the iPhone, and as Chris Dunphy just pointed out to me, they are sure to result in a surge of native development for that platform. But I think even a rapidly-growing base of iPhones can’t compare to the weight of the whole mobile phone market getting onto a consistent base of browsers.

What it all means

If you’re a mobile developer, you should consider stopping native app development and shifting to a mobile-optimized website. That’s what Elia did, and he said it’s amazing how much easier it is to get things done. Even mobile game developers, who you’d think would be the last to abandon native development, are looking at web distribution (link; thanks to Mike Rowehl for pointing it out).

See if you can create a dumbed-down version of your application that will run over the mobile web. If the answer is yes, do it. If the answer is no, try to figure out what technology changes would let you move to the web, and watch for those changes to happen.

There are exceptions to any rule, and I think it makes sense to keep doing native development if your app can’t work effectively over the web, and it’s a vertical application so popular that you can get about $50 or more in revenue per copy. In that situation, you probably have enough resources to stay native for the time being. But even you should be monitoring the situation to see when you can switch to the web, because it will cut your expenses.

If you’re a mobile customer, make sure your next smartphone has a fully functional browser that can display standard web pages. And get the best deal you can on a flat-rate data plan; you’ll need it.

If you’re an operator or a handset vendor, get used to life as a dumb pipe. By trying to control your customers and make sure you extract most of the revenue from mobile data, all you’ve done is drive developers to the Web, which is even harder to control. You could have had a middle ground in which you and mobile developers worked together to share the profits, but instead you’ve handed the game to the Google crowd.

Congratulations.

Oh, about that obituary…

In loving memory of the mobile applications business. Adoring child of Java, Psion, Palm OS and Windows Mobile; doting parent of Symbian, Access Linux Platform, and S60; constant companion of Handango and Motricity. Scared the crap out of Microsoft in 2000. Passed away from strangulation at the hands of the mobile industry in 2008. Awaiting resurrection as a web service in 2009. In lieu of flowers, the family asks that you make a donation to the Yahoo takeover defense fund.

It’s very difficult to say what’s the best mobile device in a given year, because different people have different needs and desires. The ideal device for me might be repulsive to you, and vice-versa. But most of the computer publications try to make a call anyway. If you read the end-of-year reviews online, you’ll probably conclude that the best mobile product of the year was the iPhone. It was cited by the Washington Post, Wired, Business Week, and Tech Republic (which strangely listed it as a business technology product, alongside Salesforce.com and LinkedIn).

Other mobile products getting mentions from major publications included the Nokia n95, iPod Touch, Razr 2, and Blackberry 8800. Amazon’s Kindle was the only one that showed up on both best-of and worst-of lists. The best-ofs generally liked the wireless features and screen, while the worst-ofs disliked the closed business model and “eye-poking” industrial design.

I don’t agree with any of those choices.

Since people have different needs, I think the best product of the year ought to be the one that best meets needs the needs of a particular group of users. It should be utterly compelling to its own audience. There are several questions to ask:

How efficient is it? Since people use mobile devices on the go, it should do just what the user needs, without any confusion or unneeded features. But there can’t be any critical features missing, either.

How well does it trade off size vs. power? Because it’s carried on your person, where size and weight are at a premium, it should balance tiny size with reasonable battery life.

How does it look? Because it’s effectively a part of your wardrobe, it must look great (or whatever the target customer thinks of as great).

By that standard, I think the best mobile device of 2007 — in fact, one of the best mobile products of all time — was the third generation iPod Nano.

Don’t get me wrong, iPhone fans. The iPhone is a very interesting and provocative device. There are some beautiful features in the user interface, and I love the turmoil it’s causing in the industry. Several years from now we may look back on it and call it the most influential mobile device of its time. But that doesn’t mean it’s the best product.

To me, the iPhone is more an intriguing statement of direction than a completed product at this point. The lack of 3G is a huge compromise, and Apple obviously didn’t think through the third party application thing. If you want a slow mobile browser that also plays music and videos and doubles as a somewhat awkward phone, then the iPhone is great. But for all of the cool highlights in the iPhone, I don’t think it’s enough to crush the phone industry in its current version. Future versions, maybe. We’ll shortlist the iPhone III for product of the year in 2010.

The n95 is also a remarkable product in its own way, and I know it inspires a lot of technolust, especially in Europe. But in my opinion, it’s just the latest Swiss Army Knife of the mobile world. Next year there will be another one from Nokia or Samsung or somebody else that has an even higher-resolution camera or maybe an electric toothpick or something, and people will be fawning all over that one. Like a lot of Japanese consumer electronics products, it’s not a marvelous product as much as it is a marvelously ingenious bag of features.

By contrast, in third generation Nano is not just the latest model from Apple, it’s an elegant culmination of the design work they’ve been doing for years.

The Nano doesn’t look all that great in photographs. It’s wider than its predecessor, which produced some criticism when it was announced (Engadget nicknamed it “fatty,” which is asinine when you see it in person). In real life, the Nano’s shape is compelling. It’s much thinner than you’d expect from the pictures — shockingly thin for something that has a color screen and plays videos. With its heavily rounded corners and brightly colored case, it feels a bit like a high tech chocolate wafer. You’re almost tempted to take a bite out of it.

Physically, the Nano is almost all user interface — the screen and thumbwheel take up the entire front of the device. Until we get flexible screens, the Nano is about as small as you can possibly make a device with its features. This is the endpoint, a form factor that’s going to be with us for a while.

The biggest surprise to me about the Nano is the usability of video on it. When it was announced, I thought video was a throwaway feature — who would ever want to watch video on a screen that small? But the reality is that when you’re sitting down, you’ll hold a Nano about 18 inches (45 cm) away from your face. At that distance, the screen is about the same apparent size as a 20-inch television (50 cm) at the other side of the living room. It’s not like watching a flat panel monster screen, but it’s very usable.

I’m not sure yet how much video will be used on the device, or what sorts of video, but that’s a general question about mobile video rather than anything specific about the Nano. What I’ve observed so far is teenage girls using the Nano to watch music videos together, commenting on how cute the drummer is.

And that’s just another sign that Apple made a great design for its target audience.

The new Nano doesn’t have Bluetooth built into it, or Wi-Fi, or a camera, or a phone, or a hard drive. That probably accounts for why the technophiles online have been so dismissive of it (link). But to me, it’s an almost perfect balance of functionality and art. Come back in ten or twenty years and I think you’ll find it in design museums, when most of today’s mobile devices will be long-forgotten and mildly embarrassing.

What do you think? Do you agree with my choice? If not, what do you think was the best mobile device of 2007?

When you work in consumer electronics, one of the rules that gets drilled into you very early on is that you never do anything to disrupt the holiday selling season. In the US, the month between Thanksgiving and the end of the year can account for three months’ worth of sales, if not more. During that time, you don’t change prices, you don’t alter your ad campaigns, and most of all you don’t ever say anything about future products, because that might cause customers to hesitate before making a holiday purchase.

So the CEO of ATT, giving a speech this week in Silicon Valley of all places, says that a 3G version of the iPhone is in the works:

“Has Jobs announced that? I don’t think he’s announced that, but you’ll have it next year.”

Not only does he spill the beans, but he acknowledges that Apple hasn’t announced it and then talks about it anyway (link). The next day the story is carried by the AP, MSNBC, the Times of London, Wall Street Journal, Bloomberg, the SJ Mercury News (which had the version of the quote above), and 318 other publications according to Google.

In the US, the assessment from a lot of commentators is that this won’t have much impact because the iPhone is so popular anyway. Maybe, I guess, although the iPhone isn’t sold out, so any loss in sales is still a loss. But in Europe, I think it could be a big problem. iPhone sales there are not going great to begin with, and folks in Europe are generally much more conscious of 3G vs. 2G issues. The acknowledgment that a 3G iPhone is coming could cause a lot of people to hesitate before buying.

If AT&T competed directly with Orange, O2, and T-Mobile Germany, I’d be tempted to speculate that they made the announcement on purpose to hurt the competition. But they don’t, so I suspect this is just a case of a CEO who wanted to show that he’s not controlled by Steve Jobs but instead demonstrated that he doesn’t understand consumer electronics.

The bottom line: Google is now an OS company.

The fact that Google’s recently-announced OS products are aimed at mobile devices and social networking sites is interesting, and I’ll talk about the impact of that below. But it’s secondary. I think the big, really important change is that Google has now jumped with both feet into the middle of the operating system world. That potentially has huge implications for the industry.

The impact will depend a lot on how Google follows up. If it pours substantial energy and resources into its OS offerings, it will be extremely bad news for Microsoft and other companies trying to charge money for their own platforms. On the other hand, if Google doesn’t make a serious long-term commitment, it will embarrass itself deeply. This isn’t like launching a new web application — an OS has to be complete, and it has to work properly in version 1, or there won’t be a version 2.

What they announced

It’s kind of ironic. For years after Google became a prominent web company, people speculated about whether or when it would create its own OS. The logic was that Microsoft has its own OS, and Google was challenging Microsoft, so Google would create its own OS too. But then as the years went by and it didn’t happen, people moved on to other subjects. The speculation died out. But one of my rules about the tech industry is that “obvious” things happen only after everyone in the industry has written them off. So I guess Google was due.

The company has been creeping toward the OS space for a while. Google Gadgets is an API to create small applications that run in web pages, and Google Gears is code that lets web apps run offline, making it easier for them to challenge desktop applications. But they were both relatively low-profile (or as low profile as anything Google ever does). But in the last couple of weeks, Google made two much more assertive announcements:

–OpenSocial is an effort to create a shared platform for applications that can be embedded within social websites (link).

–The Open Handset Alliance is an effort to create a shared platform powering mobile devices (link).

Although they’re aimed at very different parts of the industry, they’re both efforts to create a standard platform where there was fragmentation; and they’re both alliances of numerous companies, with Google providing most of the code and the marketing glue. I think there’s a recurring theme here.

Details on the Open Handset Alliance

Open Social was covered very heavily when it was announced a couple of weeks ago, so I won’t recap it all here. If you want more details, Marc Andreessen did an enthusiastic commentary about it on his weblog (link).

The OHA announcement was today, and I want to call out some highlights:

–It’s built around a Linux implementation called Android. Android will be free of charge and open source, licensed under terms that allow companies to use it in products without contributing back any of their own code to the public. This will probably annoy a lot of open source fans, but it’s important for adoption of the OS, as many companies thinking about working with Linux worry that they will accidentally obligate themselves to give away their own source code.

–Google is creating a suite of applications that will be bundled with Android, but they can be replaced freely by companies that want to bundle other apps, according to Michael Gartenberg (link). There is a lot of speculation, though, that if you bundle the Google apps you’ll get a subsidy from Google. The folks over at Skydeck estimate the subsidy could be about $50 per device (link). That might not sound like huge money to you and me, but keep in mind that mobile phone companies routinely turn backflips to squeeze 25 cents out of the cost of a phone. When you sell millions of phones a year, it adds up.

–A huge list of companies participated in the announcement. That’s not as impressive as it sounds; when you have a well-known brand, a lot of companies will do a joint press release with you just for the publicity value. But a few stood out:

Hardware vendors. Samsung, Motorola, LG, and HTC all endorsed the OS. HTC and LG gave particularly enthusiastic quotes. The first three companies have all been playing with Linux for some time, so I wasn’t surprised. But HTC is another matter — it is the most innovative Windows Mobile licensee, and Microsoft must be very disturbed to see it blowing kisses at Google.

(A side comment on Motorola: For a company that said it wanted to consolidate down on a small number of platforms, Motorola is behaving strangely — it jumped all over Symbian a couple of weeks ago, and now is supporting Android as well. I think it has now endorsed more mobile operating systems than any other handset vendor.)

Operators. Participants in the announcement included NTT DoCoMo (a long-time Linux lover), KDDI, China Mobile, T-Mobile, Telecom Italia, Telefonica, and Sprint. That’s a very nice geographic spread, and ensures enough operator interest to make the handset vendors invest.

–Google claims all Android applications will have the same level of access to data on the phone. That’s pretty interesting — most smartphone platforms have been moving toward a multiple-level approach in which you need more rigorous security certification in order to access some features of the phone. I’ll be interested to see how the security model on Android works.

–We’ll get technical information on the OS November 12, and the first phones based on Android should ship in the second half of 2008.

–Although Android’s first focus is mobile phones, the New York Times reports that it can be used in other consumer devices as well (link).

What it means to the mobile industry

It all depends on the quality of Google’s work and the depth of its commitment. If Android has technical or performance problems, it could sink like a stone. If it doesn’t have enough drivers or has poor technical support, the handset vendors will avoid it. If the developers can’t create good applications, users won’t want it. This is a very different business for Google — handset vendors and operators will not tolerate the sloppy, indifferent technical support that Google provides for its consumer web apps.

If, on the other hand, Google’s platform really works and the company invests in it, I think it could have some very important impacts.

Impact on Windows Mobile: Ugliness. The handset companies endorsing Android are also Microsoft’s most prominent mobile licensees. I doubt any of them are planning to completely abandon Microsoft (they don’t want to be captive to any single OS vendor), but any effort they put into Android is effort that doesn’t go into Windows Mobile. So this is ominous.

The whole mobile thing just hasn’t worked out the way Microsoft planned. First it couldn’t get the big handset brands to license its software, so it focused on signing phone clone vendors in Asia, thinking it could use them to pull down the big guys. But Nokia and the other big brands used their volume and manufacturing skill to beat the daylights out of the small cloners.

Now Google is coming after the market with an OS that’s completely free, and may even be subsidized. This will put huge financial pressure on not just Windows Mobile, but all of Windows CE. Even if Microsoft can hold share, its prospects of ever making good money in the sub-PC space look increasingly remote.

Impact on Access: Ugly ugliness. How do you sell your own version of Linux when the world’s biggest Internet company is giving one away? I don’t know.

Impact on Symbian: Hard to judge. Symbian is the preferred OS of Nokia. As long as Nokia continues to use Symbian, it stays in business. The question is how much it’ll grow. After years of painful effort, Symbian just managed to get increased endorsements from Motorola and Samsung. Now Google is messing with both of them. Japan has been a very important growth market for Symbian, now Android is endorsed by both DoCoMo and KDDI. All of that must feel very uncomfortable. If nothing else, it’s likely to produce pressure on Symbian to lower its prices. And Symbian should be asking what happens if Android turns out to be everything Google promises — a free OS that lets handset vendors create great phones easily. It’s not fun competing against a free product that’s been subsidized by one of the richest companies in the world (just ask Netscape).

Maybe if Symbian agrees to enable Google services on its platform it can get the same subsidies as Android does. It’s worth asking. If not, maybe Symbian should be looking for other places where it can add value in the mobile ecosystem.

Impact on mobile developers: Potentially great. Mobile developers have suffered terribly from two things: They have to work through operators to get their applications to market, and they have to rewrite their applications dozens of times for different phones. If Android produces a single consistent Java environment for mobile applications, that would be a big win. And if it can open up the distribution channels for mobile apps, that would be great as well. We don’t have enough details to judge either outcome yet, and the app distribution one depends on business arrangements that may be outside Google’s control.

Impact on Apple, RIM, and Palm: Probably none at all. A lot of the coverage of Android is positioning it as some sort of challenger to iPhone and RIM.

I don’t buy it.

Apple, RIM, and Palm all make integrated systems in which the software and hardware are coordinated together to solve a user problem. Android, by contrast, is only an operating system. It’s plumbing, not the whole house. Unless Google’s handset licensees magically develop the ability to design for users — a feat equivalent to a giraffe sprouting wings — their products won’t be any better as systems solutions than they are today. The OS hasn’t been the thing holding them back, and changing OS won’t alter the situation.

Android puts interesting financial pressure on Microsoft, but it doesn’t directly solve any compelling user problems. If it eventually drives a great base of mobile applications, that might eventually be attractive to some users. But in that case the systems vendors could just add a copy of Google’s application runtime (it’s open source, they can grab it anytime they want). Or they could host their devices on Google’s plumbing. Palm and RIM might both benefit if they could transfer engineers away from core OS and toward adding value that’s visible to users.

Impact on the tech industry: This isn’t just about mobile phones

I have no access to Google’s internal thinking, but even if it sincerely believes it’s only doing a mobile phone OS, I don’t think it can or will stop there. Technology products often develop a momentum of their own, no matter what was intended at the start. The lines between the computing and mobile worlds are breaking down already, and if Google creates an attractive software platform that’s free of charge, that platform will inevitably get sucked into other types of devices. I’m not saying that Android is going to end up in PCs, but if it’s functional and well supported I think it could end up running on just about everything else that has a screen.

Besides, if you look across all of the recent Google announcements, I think it’s clear that Google has a larger agenda: It wants to break down walled gardens, because they interfere with Google’s ability to deliver its services. It has even developed a standard methodology for attacking them: Create a consortium so you don’t look like a bully, and fund an “open” alternative to whatever is in the way. They are doing it to Facebook, and they’re doing it to Windows Mobile. Google doesn’t even have to make money from the consortium, as long as it clears the ground for its services to grow.

Take a lesson from evolutionary history. The most successful animals are not those that adapt to the environment; they are the ones that reshape the environment to match their needs. I think that’s what Google is doing. It’s going to use open source and alliances to suck the profitability out of anybody who creates a proprietary island that it can’t target.

It’ll be interesting to see if and how Google applies this principle to the upcoming frequency auction in the US.

Or to anyone else who gets in its way.

It’s been interesting to watch the reactions to Apple’s crackdown on people who hack their iPhones.

If you’ve been living in a cave or otherwise off the net, I should explain that Apple’s latest software update for the iPhone tends to disable phones that have been hacked to undo the SIM lock (enabling them to make calls on other networks) or to install third party applications. In some cases, Apple has refused to repair the software in these “bricked” phones, forcing the user to buy a new one.

I’ve read contradictory reports on what level of hacking causes the iPhone to be disabled. Some reports say the update disables the phone only if the SIM lock has been broken. In phones with an intact SIM lock but third party applications, word is that the update “merely” erases the apps without disabling the phone. But the fear among iPhone users is that doing anything unauthorized with the phone, even installing an app, can cause it to be disabled. Apple appears to be feeding this fear deliberately.

This has stopped (at least temporarily) the rapid growth of third party applications that developers and enthusiasts had started creating for the iPhone. Although Apple doesn’t endorse or encourage the creation of native apps for the iPhone, developers had quickly found ways to access the modified version of Mac OS X inside the iPhone, and were busily producing a series of interesting and cute add-ons.

I was astounded by the speed at which iPhone applications were appearing. Usually it takes about six months to get developers cranked up on a new device, and that’s when things are going well. Just three months after the first shipment of the iPhone, there were already a lot of interesting apps appearing, and David Pogue at the New York Times had even created a video celebrating them (link).

Most technology companies would kill to have that publicity and a bunch of third parties creating new software for their products. Web 2.0 companies are all adding application interfaces so they can get developers, companies like Adobe, Microsoft, and Google are competing aggressively to create APIs for web development, and even Apple invests heavily in encouraging developers to create software for the Mac.

The assault on hacked iPhones has provoked a nasty reaction online, starting among enthusiasts (check out the video here) and now spreading to the mainstream press. The latest example, pointed out to me by Chris Dunphy (an angry iPhone user), is from BusinessWeek (link):

“Wasn’t Apple itself the creation of two guys in garage with a knack for making interesting ideas into real things? So why punish the people who try to create something interesting, threatening them with the prospect of an inoperative phone?….The company that styles itself as the technology supplier of choice for creative people with great ideas is insisting that to own its products is to accept a defined orthodoxy where there’s only one acceptable way to do things. That doesn’t sound like the Apple I know. So I’m not going to buy an iPhone. And until Apple commits to changing this ridiculous policy, I don’t think you should either.”

I can’t remember the last time someone at BusinessWeek actively campaigned against a product of any sort.

Why would Apple expose itself to so much criticism?

The weirdest thing about this whole saga is that it’s not at all clear why Apple is putting itself through it. I’ve been asking myself that a lot, and want to share some thoughts.

The first thing I think we have to do is separate the SIM lock issue from the applications issue. They are two very different business and technical issues, and Apple may have completely different motivations for pursuing them.

Why defend the SIM lock? Many mobile phones, especially in the US, are locked for use on a particular network. All CDMA phones outside of China are like this (because there is no SIM card), and many GSM phones in the US are as well. The excuse for this is usually that the operator paid a subsidy for the phone hardware, and needs to recover the subsidy through service charges. But the operators also achieve this recovery through big cancellation fees if you switch operators before the contract is up, so the industry has not traditionally worked very hard to defend the SIM lock. Unlock codes for many phones are available online, and many operators will reportedly unlock your phone if you call them and say that you’re traveling overseas.

Apple is the first phone hardware vendor that I’ve seen aggressively defend the SIM lock, and I’m not sure why. The most common explanation on the Web is that Apple’s getting a revenue share on the monthly billings from iPhone users, so it actually loses a lot of money when any iPhone moves to another network. There is also speculation that if iPhones can be moved into countries where they are not available, Apple will have trouble extracting lots of money from local operators who sign up to carry the phone.

The latter explanation doesn’t hold a lot of water for me — most people want their phone to work in their native language, so an English-language version of the iPhone is not going to destroy the market for a legitimate iPhone in France. Also, iPhones moved onto unauthorized networks lose some of their cool features, such as the visual voicemail function. If Apple were selling iPhones in some countries for $99 and in others for $699, I would see more of a gray market threat, but the price gaps are not nearly that large. Combine the language issue, loss of features, and low opportunity for price arbitrage, and I don’t think there is enough motivation for Apple to subject itself to the abuse it’s taking.

But the revenue opportunity is a different thing. If Apple got, say, 20% of the mobile billings for an authorized iPhone, that would probably be about $120 a year from an average user — in pure profit. That’s going to be similar to the total margins Apple makes on the actual iPhone, and they get the billings every year. I have no idea if Apple’s actually getting 20%, but that sort of number has been rumored for some of the European iPhone deals. Even if Apple’s cut is only $10%, the revenue share would be a huge part of Apple’s total profit on the iPhone, and something they would be willing to defend vigorously, even if it pisses people off.

Why kill third party applications? This one is harder to understand, because I don’t understand what Apple gains from it. Having applications for the iPhone makes it more popular, and also sucks up developer activity that could go to competing products. My first reaction when I heard that Apple wouldn’t allow applications on the iPhone was that it was a control issue for Steve Jobs - he watched the base of cool Mac developers get sucked away by Windows, and never wants to be vulnerable to a third party again (link).

There are a lot of commentators online who assume the control freak attitude is driving Apple’s behavior on the iPhone. Others speculate that Apple is planning to offer a third party applications store, in which it will take a large revenue cut for third party applications that have been approved by Apple. I have no idea what the cut would be, so it’s hard to say how much it’s worth to Apple. But I think if it were a big part of their plans, they would have made that store available on the first version of the device. So although I believe they might create such a store (it’s an obvious thing to do), I don’t think that is the whole explanation. It’s hard for me to see them bringing this level of criticism on themselves just to defend that hypothetical store.

Instead, I’m starting to suspect that they have a deeper motivation that they don’t want to discuss in public because even acknowledging it could damage iPhone sales. It’s better to take criticism from people who think you’re evil than to admit that your device has a serious flaw, and I think maybe the security structure of the iPhone is a serious flaw.

When the iPhone was announced, Steve Jobs said it didn’t allow third party apps because they could bring down the phone network. I thought that was stupid bluster at the time, because on most smartphones it’s very difficult to do anything really nasty to the network. The applications and the phone run on separate processors, and given the limitations of the smartphone operating systems, it’s very difficult to do anything really heinous to the network.

But the iPhone has a much more powerful OS in it, a derivative of Unix. The reports posted online by hackers who have played with the innards of the iPhone are very disturbing (link). Here’s a great example:

EDGE network access is horribly slow, but it works….I made a few attempts to discover other hosts in the private address space, in hopes of finding other EDGE devices, but instead only found a few scattered routers, switches, and servers.

So the hacker was looking to hack other phones via AT&T’s Edge network, and was not able to do so. That’s a good thing from the perspective of the average user. But you have to wonder what those “scattered routers, switches, and servers” are. I doubt AT&T deploys switches and servers on its network just for laughs, so who knows how important they are to the functioning of the network, or how secure they are. I’m sure they were not set up with the expectation that hackers would be tickling them from an iPhone.

If you know the technical details of Edge and have any thoughts on this, please post a comment. Maybe I’m overstating the risk here. My personal reaction was that if I worked at an operator and read the quote above, my hair would stand on end (if I still had any).

Here’s another interesting quote:

Every process runs as root. MobileSafari, MobileMail, even the Calculator, all run with full root privileges. Any security flaw in any iPhone application can lead to a complete system compromise. A rootkit takes on a whole new meaning when the attacker has access to the camera, microphone, contact list, and phone hardware. Couple this with “always-on” internet access over EDGE and you have a perfect spying device.

Well, that’s pretty straightforward. There are already third party applications that turn a smart phone into a spying device, but you need physical access to that particular device in order to install them. The difference with the iPhone, according to this report, is that once you find a security hole you could install that sort of spyware remotely, via the wireless connection.

That led to a Computerworld article which says basically that viruses and other malware could spread from one iPhone directly to another without the user ever being aware of it (link). I’m not too alarmed by that just yet, because there isn’t a critical mass of iPhones in any one geographic location to infect each other. But it could be interesting the next time there’s a big gathering of iPhone users. Macworld, anyone?

To me the more troubling part of the report was the root privileges thing. I’m not a Unix expert, so I talked to someone who is. He confirmed that applications with root privileges in Unix can do just about anything. Unix is designed to empower programmers, and the assumption is that someone with root access knows what they are doing and can be trusted. (You can read some similar commentary in a eWeek column here).

There are ways to prevent third party applications from having root access, but the disturbing possibility (and I’m speculating here) is that Apple may have stripped out those protections in order to reduce the memory requirements of the iPhone and make it run faster. If that’s the case, my friend said, it may be a pretty involved project for Apple to add those protections back in. Not at all impossible, but requiring a lot of work and time.

Through my years in the industry, I’ve done a lot of research on technology users. One of the things I’ve learned is that security problems are a great way to scare people away from a new technology device. If it even sounds insecure, a lot of people will stay away from it. Based on what I’m seeing online, there is a lot of evidence that the iPhone as currently structured is a genuinely insecure device once any uncontrolled third party applications get onto it. What’s more, keeping third party apps off your own iPhone does not necessarily protect you, because malicious software could propagate from device to device.

If I were working at Apple, and this were the situation, what would I do? Well, first I would not want to acknowledge the vulnerability, because that itself would scare away customers. Second, I would do everything in my power to shut down all third party native application development. Squash it, kill it completely. And I’d be willing to take a lot of criticism for doing so because the alternative, acknowledging the security problem, would produce even more bad PR.

Let me be very clear here: I’m not saying that I know this is what’s going on at Apple; I don’t. And I’m not trying to start any nasty rumors (they are already out there). I should also point out that some reports on iPhone security have been a lot less alarmist (for example, here is Symantec’s take from early July). But that was before the latest reports surfaced.

I think we need to ask whether Apple botched the security of the iPhone in the belief that people wouldn’t try to add apps to it. They could easily have made that assumption; there have been comparatively few efforts to add apps to the iPod, after all. But the publicity for the iPhone, and Apple’s bragging that OS X was in it, made it an irresistible target for hacking.

If Apple really does have a security problem in the iPhone, I don’t think they will be able to keep it quiet. Experience shows that the best approach in this sort of situation is to come clean about the problem, take your lumps, and fix it as soon as you can. That way you at least retain your reputation for honesty. If the iPhone really is vulnerable, Apple risks ending up with the worst of all possible worlds — it’ll damage its reputation for honesty, piss off a lot of technophiles, and people will still hear that the iPhone is insecure.

It will be interesting to see how Apple handles this issue in the weeks to come.

=====

Thanks to John Hering at Flexilis for pointing me to the Computerworld story.

“When two elephants fight, the loser is the jungle.” –Ancient proverb

And so it begins.

The Apple-Nokia war finally got underway on August 29, when Nokia announced an array of new music-capable phones and an online music store. The two companies had been eyeing one-another like wrestlers outside the ring for more than a year. Apple entered the mobile phone market, but only in the US, where Nokia is a non-factor. Nokia openly declared that it’s a computing company (link), but its non-phone products so far have been different flavors of lame.

But the August 29 announcements put Nokia and Apple on a path to direct confrontation. I haven’t seen a lot written online about the importance of this conflict. I think that’s probably because many of the people who follow Apple’s business closely are based in the US and have trouble taking Nokia seriously because it’s a secondary player here. Meanwhile, Nokia’s most ardent followers are in Europe, and look at Nokia’s actions in light of its regional conflicts with SonyEricsson and the European mobile operators.

But when you stand back and look at what’s happening in the industry worldwide, it’s clear that Apple and Nokia both want very badly to be the dominant mobile computing company for young adults. That makes a huge, relentless conflict between them inevitable. They’re like two armies trying to take the same hill. One’s coming from the west, the other from the east, so there’s not a lot of fighting at the moment. But as soon as they reach the hill, there’s going to be an explosion.

I don’t know who will win, but I’m pretty sure that the main losers will be all of the other device companies and mobile operators who happen to be hanging around on the hill.

My advice to them: Run.

What Nokia announced, and why it matters

On the 29th, Nokia announced four phones, two new data services for its phones, and a new brand. Let’s start with the services.

The Nokia Music Store is just what the name says, an online music store run by Nokia. It’ll be accessible by both PC and selected Nokia phones. The N81 and N95 will be able to talk to the store directly, while for a number of other Nokia phones you’ll be able to buy music on your PC and sync it to your phone (Nokia calls this process “sideloading”).

Nokia will offer more purchase options than iTunes does. You can either buy and download individual titles (for one euro a song, a euro cent above iTunes), or you can subscribe to the store and stream all the music you want to your PC (but not save it) for ten euros a month.

Nokia positions the streaming service as a way to discover new tunes, after which you’re supposed to buy and download the ones you want to keep. I can understand the practical reasons for not streaming from the store directly to phones — there would be issues with data charges, network capacity, latency, and so on. But I don’t know how users will feel about that. If I had a streaming account on my PC, I think I’d expect to have the same service on my Nokia phone. And why wouldn’t you want to discover new music while you’re on the go?

The bigger problem is that the 120 euros you pay a year for a streaming service is 120 songs you could have bought and kept forever. That’s one new song every three days. For comparison, the average iTunes user buys three songs a month. A music subscription service is a great way to get access to a lot of music quickly, but unless you want a colossally large music collection, it’s a huge financial drain in the long run (I wrote more on the economics of it here). No wonder the music industry loves the idea of subscriptions (link).

The re- rebirth of nGage. The other new service Nokia announced was a mobile game store. You’ll be able to try games for free on your Nokia mobile or PC, and then after purchase you can use them on the PC or sync them to your phone (curiously, Nokia calls this process “installation.”) Nokia also promises multiplayer and community features.

Price per game will be six to ten euros, and Nokia says you’ll be able to pay by credit card or through your phone bill if the operator enables that. No word on what the revenue split is.

The service sounds pretty interesting to me. The most confusing thing about it is the name. The nGage service won’t work with all of Nokia’s N-series phones. I know there’s no official tie between N-series and nGage (the names were apparently chosen separately), but try explaining that to a typical customer in a store. Nokia has struggled and failed for years to explain to customers the S60 platform that it uses in a lot of its phones; picture adding yet another layer of confusion on top of that (link).

I think the other important challenge to nGage is flash. There’s a huge supply of free flash-based games on the web, and a lot of them are the sort of quick-reward, easy to use games that seem to do well on mobile devices. The biggest barrier to using them on mobiles is that Adobe charges for the mobile flash player, and so relatively few mobile phones have it installed. A small installed base of phones means that most developers don’t target mobile flash. If Adobe ever drops the charge for the flash player, or if a free flash-equivalent comes along (perhaps a mobile version of Microsoft Silverlight), it might become very difficult to convince people to pay for nGage games.

I know nGage provides a higher-quality gaming experience than flash, but I’m not sure most mobile users will care enough to pay.

Ovi is a new brand that Nokia will use as a wrapper for all of its mobile services, including games, music, maps, photo sharing, and presumably more to come (link). I guess that makes sense from a convenience standpoint — there will be one website (ovi.com) where you can go to discover all of the Nokia services (Nokia employees say that it will also be a gateway to the services of other companies as well ). Unfortunately, Ovi apparently won’t work as a compatibility mark: the phones that can use one Ovi service can’t necessarily use another. For example, many of the phones that can run nGage games can’t directly connect to the music service. A brand is most effective when it represents a coherent idea or consistent product. I think Ovi creates an expectation of coherence but doesn’t deliver it. It just says that Nokia’s in the service business, which Nokia cares about but is not something that concerns users

If Nokia doesn’t make all the Ovi services work on all its data-capable phones quickly, I think the varied incompatibilities between the Nokia services and devices are going to be a nightmare to explain at retail.

The four new phones
The N95 8GB adds more memory to Nokia’s flagship Swiss army knife phone, which includes a 5 mp camera, improved 3G, WiFi, and GPS. This is the one that online reviewers always compare to the iPhone. It works with both nGage and the music store, and its base price is 580 euros before subsidy.
The N81 is a slider phone with WiFi and 3G, and has dedicated buttons to access both nGage and the music store. It’ll sell for 430 euros pre-subsidy.
The 5310 is a slimline candybar phone that can play music synced from the Nokia music store. It cannot access the music store directly. It has dedicated music controls next to the screen, and its base price is 225 euros.
The 5610 is similar to the 5310, but adds a slider and built-in camera. Its base price is 300 euros. A lot of online reviewers have been comparing this and the 5310 to the SonyEricsson Walkman phones, and I think that was probably Nokia’s thinking. But hold that thought because it’s not necessarily how things will work out.

What’s the impact? A huge amount depends on execution. How well will Nokia’s new services integrate with the phones? How easy will it be to play songs and games? How many titles will be in the Nokia stores, and how good will they be? Services and mobile devices often live or die on the little details of usability, and we can’t judge that for Nokia yet because we can’t play with the new products and services.

But Nokia’s direction is very clear. It wants to be in the mobile Internet services business, as both a developer and publisher of content and services. It’s going to tie those services directly to its phones. And knowing Nokia, it’ll keep iterating on both the phones and the services until it gets them right.

That’s why Apple and Nokia are now at war. Even if Nokia’s current products turn out to be lame, it’s going straight into the territory that Apple has been pursuing ever since the first iPod shipped.

Apple’s new products. I should add a little context on Apple’s recent product announcements. In September, Apple made a lot of changes to the iTunes and iPod lineup. The move that got the most attention was the price cut of the iPhone from $599 to $399. I’ll write more about that below. The other changes that stood out to me were:
–iTunes can now be accessed via WiFi on the iPhone and iPod Touch. This corrects a glaring weakness in the original iPhone. It’s interesting that Apple apparently hasn’t enabled the iPhone to talk to the store over a cellular connection. That may be because the network the iPhone uses in the US is too slow to easily download music, or it may be that AT&T doesn’t want a lot of data traffic going over its network when the phone’s data plan is flat-rate.
–The video version of the Nano, starting at $199, is a heck of a lot of technology in a very cute little package.
–The iPod Touch is basically an iPhone without the microphone and cellular radio. It makes a really interesting PDA for people who want to buy a basic voice phone and carry their entertainment separately. It’s priced at $299.

(As an aside, I have a request: Once the iPod Touch starts selling like gangbusters, would someone please go find the person at Sony who decided the Clie handheld business was a dead end, and kick them in the shins?)

Relative strengths of the competitors

Or, how to piss off both Apple fans and Nokia fans in the same post.

Apple and Nokia are very different companies. Here are their relative strengths:

Resources. No contest. Although Apple is a very successful company, Nokia has vastly more financial resources.

Logistics. Nokia is one of the greatest logistics companies on the planet. It churns out hundreds of millions of phones, changes models frequently, and almost everything works properly. If Nokia were running the US Federal Emergency Management Agency, New Orleans would be 20 feet above sea level by now. Apple, by contrast, does a very competent job of managing contract manufacturers in Asia. Advantage Nokia.

Telephony experience. Another huge Nokia advantage. Designing phones and getting them qualified on networks is really tricky, and Nokia knows how to do it better than anyone else.

System design skill. This is Apple’s core competence; it knows how to design hardware and software together to create a beautifully integrated system. Nokia’s phones often appear as if their hardware and software were designed by completely different groups and slapped together at the last minute (because, in many cases, that’s exactly what happened). This works great in commodity phones, but if the competition is for who can create the most elegant data experience, Nokia is at a huge disadvantage.

Brand power. Wow, this is a tough one. Apple has one of the coolest brands on the planet. Nokia’s brand is beloved in Europe, and in most of the world it personifies upward mobility (except in the US and Japan). I call this one a tie.

User interface. Apple knows how to design these. The kindest thing you can say about Nokia’s interface designs is that they’re better than many other phone manufacturers. But that’s like comparing a three-legged dog to a two-legged dog. Nokia’s trying to get better — at the announcement event, it showed video of a forthcoming device with an iPhone-style touchscreen (link). But for now, this one’s clearly a strong Apple advantage.

Cleverness. Hey, it’s Steve. Nokia’s management is extremely smart, but you look to them for great operational execution, not brilliant strategy. After all, this is the company that brought us the original nGage.

Industrial design. I’m going to get flamed by the Nokia fans for this, but Apple has a clear advantage in design. The comparison: Nokia sometimes creates a great design. Apple rarely creates anything less than a great design.

Music solution. You’d think this would be an overwhelming advantage for Apple, but its arrogant handling of the music companies has made them even more desperate to tear Steve Jobs’ throat out. They’re anxious to work with someone like Nokia. Apple still has an advantage, but it has opened the door to competitors more than it had to.

Breadth. Nokia can fight on more fronts, and might be able to outflank Apple. For instance, Nokia’s revived nGage game service gives it a second interesting offering for young people, whereas Apple is limited to just music and video. This is why I think Apple’s decision not to open the iPhone to third party app developers is a huge mistake. If Apple had the help of third party developers, it could more easily fill out its software portfolio.

How they’ll fight

Nokia wants a war of attrition. It will try to force Apple to compete on more fronts than it can afford to cover. I think we should expect to see a broad array of services added to Ovi quickly, aimed at enticing young adults in all sorts of different ways. Nokia will probably also launch a blizzard of media and entertainment phones with varied features, in the hope that a couple of them will hit sweet spots in the market.

Apple’s game is to keep Nokia off balance and grab the most important opportunities. Think of a fencing expert: dodge, feint, and then stab the other guy in the heart. Apple currently has a product advantage — its music service is already working. So it will try to capture as many customers as it can before Nokia gets its act together.

Apple can also use Nokia’s size against it. Nokia has a huge product line and has to position each product carefully within it. Apple has only one phone, so it doesn’t have much to protect. That’s where the iPhone price cut comes in. The iPhone had been positioned against the n95, at the top of Nokia’s product line. With the price cut, the iPhone is now looks much closer to the middle of Nokia’s line, the phones that were supposed to be aimed at SonyEricsson.* Nokia can’t slash the pricing of the n95 without screwing up the prices of its entire line, so with one price action Apple accomplished two things — it can reach a lot more customers, and it forced Nokia to go back and rethink its competitiveness.

We should expect more surprise moves from Apple. It’s more important for them to keep Nokia off balance than it is to please every customer. I think that’s why Apple was willing to piss off the iPhone loyalists with a sudden, large price cut.

*Because of varying subsidies, it’s hard to tell what the actual street price comparison between the new n95 and iPhone will be. The current n95 sometimes gets subsidized down by several hundred dollars if you buy a multiyear service contract. Maybe the new n95 will be subsidized down below iPhone prices. Maybe the iPhone will be subsidized too. Or maybe now that Nokia’s offering its own services the operators will refuse to keep subsidizing the n95. We need to wait until the iPhone and Nokia’s new services premiere in Europe this fall.

Impacts of the war: Alas, the innocent bystanders

The common denominator between Apple and Nokia is the imperative to move quickly. Nokia wants to broaden the competition fast, Apple wants to keep surprising Nokia with new features, products, and other changes. That’s going to accelerate the pace of change in the mobile industry. And the accelerating pace of change, rather than anything in particular that Apple or Nokia have done today, is the biggest challenge to the rest of the industry. The other players have been struggling to keep up with the current rate of change; what will they do when Apple and Nokia step on the gas?

I’ve seen these situations before. You think you’re just about keeping up with a competitor, and suddenly they disappear in a cloud of dust. I believe that’s about to happen in mobile phones.

A shift from hardware design to systems design. Let’s look at which companies have been most successful in smartphones: RIM creates e-mail phone systems that combine hardware, software, and services. DoCoMo and the other Japanese operators drive systems designs that combine hardware, software, and services. The iPhone does the same. Previously, those competitors were confined to particular countries or relatively small vertical markets, but now the world’s biggest phone company is trying to do the same thing. That raises the competitive bar for everyone else in the industry.

What are companies like Samsung and Motorola supposed to do? They don’t know how to create their own services, let alone integrate one well with a phone. In the music market, there are a lot of third party services out there, but none of them have been effective so far at challenging iTunes. I think they’re not strong enough to change the competitive situation. Same thing for the operator services.

So the music phone market looks ugly. What’s worse, if Nokia and the systems companies extend their new design approach to other data markets, the traditional mobile phone companies might be cut out of most of the big growth opportunities. They need to learn a new set of skills instantly, and they’re far behind the curve.

The interesting potential exception to this situation is SonyEricsson, the leading vendor of music-enabled phones in Europe. Their hardware’s nice, and they have a clean user interface that looks inspired by the iPod. Because I’m in the US, I don’t have a good read on how smoothly the SonyEricsson phones integrate with operator and third party music stores. Is the experience as easy as using iTunes?

The Register says that Omnifone’s Music Station is a promising possibility (link), but it’s a subscription service costing 3 euros ($4.11) per week. For that same price you could buy 216 songs on iTunes per year, and at the end of the year you’d actually own something.

I really have trouble seeing the long-term economic benefit of a music subscription service for a user. If you subscribe to one, please post a comment and educate me.

SonyEricsson’s management hinted to Time Magazine that it may create its own music service (link). If so, it had better hurry up. I have a lot of respect for SonyEricsson’s hardware designs, but if it’s limited to music stores with weird business models and ones that don’t integrate seamlessly with its phones, it’s going to have a very hard time outcompeting an accelerating Apple and a Nokia that’s learning to integrate solutions.

Microsoft: Reverse course, again. This is the situation in which Microsoft could have stepped in to offer a music service to the phone companies challenged by Nokia. But in an exquisitely ironic move, Microsoft basically shot its licensed music store initiative last year in order to support the proprietary Zune. Now it can’t step up to the opportunity.

Oops.

Microsoft is probably too late to recover in music, but as Nokia adds new services there should be a lot of opportunities to license equivalents of them to Nokia’s competitors. Microsoft should focus less on selling its own OS, which scares the phone companies, and more on delivering services they can build into their phones.

And oh by the way, it’s time to bury Zune. The iPod Touch just lapped it. If Microsoft wants to lose money on proprietary hardware, it should focus on Xbox. At least there it’s buying market share for its money.

The operators lose control. They were struggling to establish their own services suites back when things were moving slowly. Now that Apple and Nokia are shifting into high gear, I don’t see how the operators can keep up.

You can find very different scenarios online for where this will lead. Andrew at the Register predicts that the operators may strangle Ovi by refusing to sell any phones that support it (link). He has a good quote from someone who knows both Nokia and the operators:

The operators own the relationship with the customer. They’re not going to allow Nokia to own it.

On the other hand, Richard Windsor, the excellent telecom analyst working for Nomura Securities in London, said in an e-mail brief that the operators are doomed:

Through their inaction, mobile operators have squandered the opportunity to be the service integrator for mobile and are left with the prospect of offering nothing to users except commodity data packets.

Who will be right? It depends on Nokia’s ability to generate user demand for its services. If the users want the services, the operators will have to go along with it. I assume Nokia understands this and is prepared to do a big marketing push. Unlike Nokia’s previous efforts to set up content portals, this time it has to succeed or it surrenders the future to Apple. So the conflict with Apple also locks Nokia into a war with the operators.

Isn’t this fun?

If I were running a mobile operator, I’d stop trying to create my own services bundle, and focus on enabling as many Internet companies as possible to deliver services on my network, in exchange for a small cut of their revenue. An operator with the innovation of the open Internet behind it might be able to keep up with Nokia and Apple. But an operator working alone will be very lonely indeed.

What does it mean for users? You’d think that all this new competition would be good for users, and in many ways I’m sure it will be. But Apple and Nokia are both showing a disturbing tendency to keep everything proprietary. The iPhone is not open to third party developers, and at this point Ovi appears to be about marketing Nokia services, not opening up the richness of the Internet. (To be fair, Nokia employees say that will change, but I’m not sure if they mean that they’ll offer access to any Internet service, or just to some selected ones that they cut a deal with. I suspect it’ll be the latter.)

Welcome our new Apple and Nokia overlords. There’s a disturbing possibility that we may end up exchanging one set of walled gardens for another. They’ll be lavish, beautiful gardens, far better than the operators’ truck farms for data. But we may not get the open data marketplaces that a lot of people have been hoping for.

If you want to read other perspectives on Nokia vs. Apple, check these out:
-A confident view from Finland (link)
-A cautious view from Jupiter Research (link)
-An outstanding article by Mark Halper at Time, with quotes from Nokia and SonyEricsson (link).