|Vodafone alliance seeks to pummel Nokia into submission |
Published: Thursday 22 April, 2004
Nokia missed the boat on clamshells, Motorola on cameraphones – headline grabbing mistakes, but ones that will seem almost trivial in impact if the major European operators succeed in their latest moves to limit phonemakers’ power. Vodafone and other large players are proposing an alliance that would, in effect, dictate the base specifications for handsets to the manufacturers, dramatically shifting the balance of power and rewriting all the rules – and the economics – of the branded phone market.
It seems that Vodafone and its allies want to pull the old trick of claiming to be ‘creating an industry standard’ in order to, in reality, further their own agendas and increase their control. The world’s largest carrier is teaming up with the members of the Freemove clique (Orange, Telefonica Moviles, Telecom Italia Mobile and T-Mobile) to devise a set of base protocols and functionality to which all handsets must conform in order to be accepted on to these carriers’ networks. (While Freemove is a roaming and purchasing collaboration targeted directly against Vodafone, clearly in the matter of handset control the two parties feel they must unite against a common enemy.)
This is an aggressive and dramatic twist in the ongoing battle between operators and handset makers – and in particular between the giants of those sectors, Vodafone and Nokia – to take the controlling influence in the mobile phone sector. Traditionally in Europe, the large phonemakers have set the design agenda and imposed this on the carriers. For the past few years, the carriers have been seeking to be the ones to dictate terms, as they aim to sharpen their competitive edge with more differentiated handsets and to establish their own brands, aims that the volume-focused phonemakers were reluctant to endorse because they would involve higher design costs and a weakening of their own branding.
While some handset makers, even the second largest, Motorola, have given in over time and been prepared to make phones to the specification of a major carrier partner and under that carrier’s brand, Nokia has stood firm against such a move, aiming to increase the already impressive power of its own brand name and refusing to kowtow to its customers. In recent weeks, its stubbornness appeared to be paying off, especially when Vodafone, in February, reversed a previous statement and said it would, after all, offer Nokia 3G handsets as part of its early roll-out of Live! on 3G.
Now that apparent uneasy truce is over, with a move that is aggressive and daring even by Vodafone standards. The woolly talk about open standards is so much window dressing – there are already plenty of standards bodies focused on aspects of phone design, from the Open Mobile Alliance to the 3G Partnership Project. But many of these are dominated by the handset makers – in the OMA’s case, by Nokia itself – and so do not serve the operators’ purposes at all.
So which company is the first to offer technology input to the new supergroup? Not a company with a sound track record in successful phone architectures, but a start-up with no commercial products as yet, phone OS maker SavaJe. SavaJe and its Java-based system have attracted significant attention because both Vodafone and Orange are investors, albeit minor ones, and there was always a sneaking suspicion that the carriers were grooming their dependent protégé to be a weapon against Nokia and Microsoft. Few would have suspected that SavaJe would form the spearhead for quite such a bold attack.
Ironically, the new group provides many echoes of the early days of Symbian OS, which was the handset industry’s attempt to set and control a universal standard. Like Vodafone, the Nokia-dominated group took a relatively minor but innovative technology, from Psion, and created a very sharp weapon. While the most immediate political objective was to fend off Microsoft, there was an undercurrent of trying to keep power over the operators, which were only belatedly involved in the Symbian process at all.
Vodafone argues that greater commonality of design will reduce time to market and encourage the launch of phones that genuinely meet the requirements of consumers. It claims the group does not wish to create new technology or push a particular OS, just to define minimum functionality levels for handsets and OSs.
But this is belied by the SavaJe proposal, which has the potential to throw an operator-controlled OS into the ring to fight with Symbian OS, Windows Mobile and Linux. And it is a small step from a list of basic requirements to a wishlist of the type produced by the Japanese carriers for their manufacturers.
Those carriers are, of course, the role models for this unholy European alliance. The Japanese and South Korean operators have always exerted huge control over their suppliers, to the extent of commissioning and specifying individual phones. In Europe, where until recently the phone rather than the operator carried the important brand, the situation has been the opposite – handset makers created models that they believed would appeal to consumers, who made decisions based on the phone and then found the network to carry it, and shopped these around to the operators.
So what happened to start to shift the balance? The 3G fiasco was the biggest factor. Combined with the telecoms slump to which it contributed and with deregulation, the delayed roll-out of UMTS in Europe put the operators under unprecedented pressure to milk their existing networks for more revenue and be more competitive with each other. One way to achieve this was to reduce churn by strengthening the power of their own brands and by offering more differentiated handsets. This, in turn, made it more critical for the operator to control the phone design. The phone, rather than the service, had become the chief selling point for the network and so it could not be treated as a commodity device any longer. Plus, in their attempts to cut back on debt, the major cellcos became increasingly sensitive about the prices they were paying for the phones that they then subsidized for end users. It was in their interest to increase their sway over the manufacturers in order to wield a bigger stick when it came to price negotiations.
The other impact of the 3G saga was to undermine operator trust in the handset makers. One of the factors in the shaky roll-out was the lack of suitable and appealing phones – the models that launched with the Hutchison ‘3’ service in the UK, for instance, were bulky with low battery power. The carriers, keen to place the blame for 3G’s early failures on the handset makers, saw another powerful reason why they should take greater control of the design process themselves.
At February’s 3GSM conference in France, Vodafone CEO Arun Sarin pursued this theme, claiming that his company’s 3G networks and services were ready but it was still waiting for decent handsets. "We have deployed 3G, made sure our products and services are there and we are waiting and waiting and waiting," he complained. “We can't turn the future on until we have handsets that are at least as good as the 2G and 2.5G ones we have. The experience today is unacceptable to our customers."
Nothing illustrates better the reason why the carriers have chosen this timeframe to try to gain control.
But they may be biting off far more than they can chew – and that’s if European competition law actually allows them to use any teeth when trying to impose their new ‘standards’. The five players would have a near-monopoly in several major territories, and as such would have huge power to insist on their specifications, something that ultimately would stifle innovation by the handset makers.
The fact is, European operators have no real understanding of the science or the economics of handset design. They may have learned much from their Asian counterparts in recent years – Vodafone in particular, through its acquisition of JPhone in Japan – but they remain novices in the game. Nokia CEO Jorma Ollila, sharing the stage with Sarin at 3GSM, put the manufacturer point of view on the 3G debate, claiming the operators had failed to get their networks ready to test phones properly. "I think the waiting period for handsets has been quite reasonable when you look at the laws of physics and the reality of how the technology works,” he said.
The point was quietly made but is potentially devastating. Like a political party in opposition, it is easy to assign blame, but far harder to take on the task oneself. And it is not just a question of engineering expertise, but also the complete change of business model that would be required to provide the end-to-end service of the Japanese operators. DoCoMo and KDDI may have huge power, but they also have to make massive investments in R&D and customer support.
“European operators are unlikely to take on the aftersales and aftermarketing of the phones that the Japanese end-to-end model requires,” commented Christophe Francois, head of strategic marketing at mobile Java firm Esmertec.
That would be the logical end point of the Vodafone strategy – but one which it is unlikely the operators will dare to reach, even supposing they can remain in agreement for long enough to devise a specification at all. Instead, they are likely to take a compromise route that they hope will give them the power without the responsibility. They will not seek to become creators and supporters of handsets or OSs but instead will try to sideline the major players with increasing reliance on smaller, more malleable partners. This process has already begun with the commissioning of operator-branded ‘featurephones’ from white label manufacturers and even big name vendors, and Vodafone’s preference for using second tier suppliers such as Sharp and Panasonic for its Live! launches.
So far, so reasonable, and the policy has certainly spurred impressive creativity from the midsized vendors and dented some of the complacency of Nokia and Motorola. A base specification would take the strategy a step further by making the operator demands on their suppliers explicit and making it easier for smaller manufacturers to achieve the time to market necessary for the mass market. It could also amount to a ‘contract’, sorting the compliant phonemakers from the independents.
But considering adopting SavaJe as an ‘operating system of choice’ for phones on their networks would take the small partner strategy to the extreme, setting an entirely unproven technology up against Microsoft, Nokia and the Linux brigade, with the backing of companies that, while powerful in purchasing terms, have no real understanding of handset OSs. Asserting independence and gaining a lead by backing a minority technology is nothing new in mobile – Samsung did it when it adopted the then-obscure CDMA from Qualcomm; Symbian did it by resurrecting Psion – but those moves were made by experts in their field. The Vodafone plan is like the supermarket starting to grow crops.
Any move to control rather than merely select technology carries huge risks for the operators. Despite its recent troubles, Nokia still has a more powerful consumer brand than any carrier. Its mass market devices are suffering from some stagnancy in innovation, but they still work. Whereas the SavaJe system is unproven and is resource hungry – and the minute a carrier puts out a phone with poor battery life or serious glitches, its brand will be undermined and Nokia’s, by contrast, enhanced. The problems that Orange suffered by being an early shipper of the original, and flakey, Windows Mobile would be magnified tenfold – and the carriers would no longer be able to fall back on blaming the handset majors for their customers’ dissatisfaction, as they have done with early 3G.
SavaJe has various weaknesses. Like Symbian OS and Windows Mobile, it requires a separate application processor as well as the basic phone components and real time OS and so needs at least 100MHz and 32Mbytes of Ram to run. Also, it takes various features from Java2 Standard Edition, the desktop version of the technology, which increases its functionality but means SavaJe devices will not support all applications written for the dominant mobile variant, J2ME.
Its appeal to the operators is that, because it is Java-based, it boasts strong capabilities for allowing the operator easily to customize the user experience on the handset. The ability to do this is fundamental to the cellcos’ differentiation strategies – although the same effect can be achieved using a Java runtime on a real time OS (see separate story). Other advantages that SavaJe itself claims for its OS are that it has security standards pre-built in and supports multitasking, over the air application provisioning and the ability for operators to create multiple user interfaces for different target bases, without changing the underlying software.
The arguments of Bob Gilkes, SavaJe’s CEO, in favor of his company’s technology highlight why its plans are music to the carriers’ ears despite its almost inevitable teething problems (which include slow response time). He claims Symbian OS (through its Psion heritage), Windows Mobile, PalmOS and Linux have all moved to cellphones from the PDA/PC environment, where specifications are driven by the device makers. This, he argues, makes them strong tools for the handset makers – which are focused on volume rather than customization - but are not necessarily suited to the cellcos’ needs.
"The operators have had to take what they could rather than what they wanted. They have begun to create their own branding and segmentation and in doing so they run into a battle with the providers of the operating systems,” he commented – words that could have come straight from a Vodafone script.
Whether or not the Vodafone group goes as far as to make SavaJe a preferred platform, all eyes will now be on Nokia’s response. Of course no handset maker can afford to be excluded from the networks that make up the bulk of the western European market – Nokia’s strongest territory – and it will have to make at least some supportive noises about the base specifications. The new division of its business gives it new options – it could concentrate its pursuit of a global brand on its high end enterprise and media phone lines, and accept some operator intervention in its core ranges. If the high end products were successful enough, their desirability would strengthen the Nokia brand and increase the demand for their phones at all levels – and the carriers would have to listen. European consumers are highly sensitive to phone brands, and also value their ability to switch networks fairly easily, a factor that will always weaken the operator branded services, which threaten lock-in.
Long term, we believe Nokia still holds the strongest cards. It is making some very serious moves to disentangle its business model from the operators and build up different customer bases, by addressing the consumer electronics and the enterprise markets directly. These two divisions will take years to equal the core Mobile Phones unit in revenue terms, but they will make a great contribution to margins, brand value and Nokia’s ambition to be at the center of all end user technologies, not just the phone. It is also building its influence and revenue stream from areas such as software licensing, with the Series 60 platform, and – like all the handset makers – by accumulating a huge portfolio of patents as the basis for a Qualcomm-style intellectual property business. Which brings us on to another key pawn in the game with the cellcos – the fact that Nokia also has an infrastructure business, giving it critical expertise in aligning handset design to networks, plus a high level of influence over those operators that use its equipment.
This is a long game and one being played with Cold War levels of cat and mouse defensiveness. The two giants will continually call one another’s bluff while they maintain an uneasy balance of power. As long as they remain as strong in their markets as they currently are, that balance will not tip very far. The cellcos can cause Nokia some serious short term problems, some of them hinted at in its first quarter results, by reducing their dependence on its midmarket phones and forcing it to accelerate its search for new revenue streams. But Nokia has many places to run. Uniquely among handset makers, it is not entirely reliant on carrier business and, indeed, is actively keen to broaden its base. So while the easy response would be to take the operators’ shilling in order to preserve its volumes, that would turn the clock back for Nokia. Instead, it has to pursue its own attempts to set ‘standards’, in order to realize its long term ambitions, even at the cost of some severe but temporary pain.