Tech on the Side: Business Models vs Capabilities
Feb 25, 2014

Tech on the Side: Business Models vs Capabilities

One of the most fascinating aspect of following technology is not just the speed at which the technologies themselves change. It is that the shifts are so large and so fast that business models need to get changed on the fly. Many of the biggest battles in tech are not battles between products, as it might seem to the consumer, but existential battles between competing business models, business models who are made possible or obsolete by the changing capabilities of various companies. And many of the biggest failures in recent years (such as Nokia and Blackberry) ultimately stem from a stubbornness to make the need changes quickly enough.

Android vs Apple:
For a consumer buying a new phone for tablet, the fight might seem to be between the small advantages here or there of the one system or the other. At business level, the fight is an all out war between two very different business models. Apple profits off the sale of high end devices where they control the hardware, software, and services needing capacities to do all three. Google gives away Android on a less-than-free business model (ie free, but OEMs get profit sharing from app sales), letting various OEMs duke it out for the typically negligible (unless you are Samsung) profit while Google profits off ads as people use the services it bundles with Android outside of China (where its business model can't penetrate). Google and Apple have very similar capabilities to create the software of operating systems, and have created relatively similar operating systems, but their business models are miles apart.

Windows Phone:
Microsoft is a great example of the interplay between capabilities and business models. They have extensive capabilities when it comes to writing operating systems and other premium software. That has been their go to competency for decades, regardless of small additions of hardware like the Surface or the Xbox. Their business model has been to make operating systems and software and to sell them. It worked great, and has printed tens of billions in profit for them. While Apple and Google are the next two in line on their ability to create operating systems, neither of those two has ever tried to sell them for profit. Today, that core capability remains in tact. What threatens Microsoft is the business model, particularly in mobile.

You can't have a business model premised on selling operating systems when a competitor is giving away their operating system for free. Unless, that is, your operating system is considerably superior or enjoys the kind of network effects (such as a vast 3rd party software portfolio) that justifies its price as Microsoft enjoyed over the free linux. For mobile operating systems, Microsoft simply doesn't have either of these and thus can't reliably make much money selling mobile operating systems. Up to relatively small differences, Windows Phone and Android are pretty similar in quality with Android now being the one to enjoy the enormous app portfolio where Windows Phone lags behind.

In response, Microsoft has changed its business model. First it started selling first party hardware in the Surface (following failed attempts to do the same with phones). Then, in a much bigger move, it has purchased Nokia. This transitions Microsoft into the Apple/Blackberry business model of profiting off the hardware sales of devices where a complete software/services/hardware package gets sold. Microsoft will now sell physical phones loaded with their operating system. Perhaps they will be able to convince other vendors to likewise licence Windows Phone for a trickle of money - thus retaining some of the old business model - but they are certainly betting heavily on the new business model shift.

The difficult with a shift in business models is that sometimes one can't actually shift business models with one's current capacities alone. In this case, Microsoft didn't have the abilities to do the mass hardware production side of things that Apple and Blackberry had. So if they wished to emulate that model, they had to buy out the additional capacities to the capacities they already had. That was what the Nokia purchase was.

Microsoft Office:
Part of the problem for Microsoft is that it has this tension between different business models. Its previous model of selling its software means you want to be able to sell Office as widely as possible, which should include iOS and Android. But it its transitioning into a new business model of selling integrated hardware, which means you want to retain the competitive advantage for yourself and not put Office on these other platforms. They have the competency (Office) but have wavered on the best business model to deploy it with. Both business models have their problems, so it isn't an easy choice despite the claims of some tech commentators. Credit where credit is due: Microsoft is one of the few companies willing to substantially alter their business models when needed, and they have, but they have to figure out where to commit Office.

Nokia probably committed the biggest mistake in the smartphone wars. Worried that they wouldn't be able to differentiate among the legions of Android vendors, they hitched their wagon to Windows Phone. This resulted in quickly collapsing sales and the eventual sale to Microsoft on the cheap. I believe this was a problem of not fully appreciating what their core competencies were. Nokia's strengths - what led them to be the number one feature phone supplier pre smartphones - was their enormous supply chain and distribution networks. They could produce more phones, for cheaper, and deliver them to more countries than anybody else in the game could, including Samsung who was next in line. This is precisely the battle lines upon which Android smartphone wars are fought. While the premium phones try to stuff a few fancy exclusive features (better cameras or screens or software tricks), for most of the low and middle end it is a relatively phyrric game of commoditization. But that is the type of situation where excellent supply chains and distribution networks excel. Put Nokia's advantages with software (they were leaders in this area in the feature phone business and could have value added on top of Android) and hardware work (excellent cameras) they undoubtably could have been a major player in the smartphone games, perhaps even enjoying the lofty position capitulated to Samsung. So this was a situation where the business model was the same (sell physical phones for profit) but that the choice between Android and Windows Phone was made for a reason that didn't underscore their particular competencies.

I have a guess that the previous success Nokia had with Symbian solidified the viewpoint that having a unique operating system could be a big advantage as it differentiated them, which was fine in the feature phone wars but not true in the smart phone wars giving the dominating importance of a health app ecosystem and the like. They should have poured their need to differentiate and their software prowess into skinning Android instead.

Blackberry had an excellent business model, indeed it was the same one that Apple had: sell physical phones where one creates the complete top to bottom hardware/software/services package to make a highly integrated and desirable experience. When the iPhone was released, Blackberry was given ample opportunities to attempt and emulate the iPhone - pushed by Verizon to do so - and dutifully set out to do so. Their problem was, in retrospect, simple: they didn't have the capacity to do it fast enough. They knew what they needed to do, poured billions into trying to do it, and really set their hearts at it, at least in the last few years, but it took them more than a half decade to really come out with a modern smartphone operating system that could have competed were it not for the punishing disadvantage with apps that effectively takes them out of the consumer market. If they had the capacity to come out with a genuine iOS/Android competitor in 2010 perhaps the consumer side of the business could have been saved, but it was a lacking of a capacity. And it wasn't even an obvious lack of capacity: Blackberry clearly knew how to write software and even ushered in the proto-smartphone era, but it wasn't enough of a capacity to fill the pretty large gap. Notice that Nokia didn't try to take their software capacities from the feature phone era and make their own OS, they correctly recognized they needed to use Android or Windows Phone, they just chose wrong.

Given that Blackberry lacked the capabilities to continue their previous business model into the smartphone era (a model that Apple emulated), what should they have done differently? Consider again their core competencies: the ability to create very secure, business focused software. That is what catapulted them to their first business success and subsequent consumer halo success. They also had their best in class keyboards, which was a competency that touchscreens largely made obsolete.

Imagine instead if they created their own devices that ran Android but skinned these competencies on top of that. That would be a big software project, simpler than making a full operating system as they tried to do, but a big project nonetheless. Heck, the original Playbook launched without email underscoring the difficulty of even basic things when trying to do them in a secure way. I suspect it would be a project they could have accomplished given their eventual ability to make such an operating system only years too late. These devices would have then had all the consumer appeal that Android does now, with the various secure business email and the like built on top of it.

Recently Blackberry started releasing BBM for iPhone and Android. A global cross platform messaging system is a entirely new business model. Given how WhatsApp just sold for $19B dollars, it underscores how important messaging can be. But again, it was years too late. If they were not going to succeed, they should have aggressively pushed to have BBM be the default global messaging service. Further, there was all sorts of opportunity for creating secure multi device management system, cross platform secure business apps, and the like. It would have been a radical change in business models, but one that accurately reflects their competences.

From a thirty thousand foot view, the problem with Blackberry was that it stuck to its business model even while its core competencies were not up to the task, when it should have stuck to its core competencies either with a (only slightly) new business model of skinned Android devices or some of the radically new models above.

I was quite glad when it was announced that Google was selling Motorola. While many people paralleled the Google/Motorola purchase with the Microsoft/Nokia purchase, they are far more different than they appear. The deal made sense for Microsoft for the reasons above. It was a new business model, to be sure, but still one which means a per device profit it is just now selling a complete hardware/software device opposed to just selling the software as they used to for desktops. Google, however, has nothing to do with making a per device one time sale. They profit off of ads used, and they make precisely the same amount of money if they sell the phone that views the ad or if Samsung does. In fact, there was an enormous tension with their business model because it put them in competition with the other OEMS who their business model said were partners. They always had to choose between helping Motorola devices get some advantage (otherwise why have Google own Motorola) and pissing off the very people who were selling phones with their software. It didn't make any sense, and after grapping the patents Google dispensed of the silly project.

It should be said that Google is rapidly expanding their competencies, faster than any other company. Whether it is movement into hardware, robotics, all sorts of experimental driving cars and high speed fibre, mapping, you name it. There is a tonne of stuff being done in that company that expands what they are capable of doing but doesn't yet have any clear business model to go with it. Maybe some day some of it will, but I am not worried. When a competency matures, they can choose appropriate business model's at the time.

The biggest mistake in tech?
We will never know, but Google had the opportunity to do a radically different business model. They could have been the Microsoft of smartphones. That is, they could have charged money for a closed source Android. With Android crushing world wide with over a billion devices. Imagine if those smartphones were all paying Google a direct fee, before any considerations for its normal money from ads. That there is this potential for a successful alternative is clear. What we don't know is if it would have actually been better. Namely, if this had been the case, perhaps Android would have never taken off and every smartphone company would be jumping on their own software (like Tizen), or other open source alternatives would crop up and Android wouldn't have the marketshare it has. Android crushes Microsoft, Blackberry, Nokia's old OSs, and holds Apple at bay. Perhaps none of this would be true had they taken this option. But there is also the potential we would be in the same position but Google would have an additional ten billion dollars in the bank. If so, it would be among the biggest opportunity costs in tech.

What I think is problematic is making poor decisions to try and hang on to a specific business model. When a business model is working well - as Apple's currently is - then sure double down on it. But if it starts to falter as it did for Microsoft, Nokia and Blackberry, quickly changing it up may be necessary. Building out competencies - either internally as in Google's case or by purchases as in Microsoft's purchase of Nokia - allows for a wider range of potential business models that are often superior or necessary given changing circumstances.

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