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Follow UsThe hyper growth in mobile smartphones and the associated app store evolution have ignited the much-needed debate on two-sided market theory and its implications. The mobile used to be a simple device when we used it only for making voice calls. However with the deployment of wireless broadband network services and the availability of powerful smartphones at reasonable prices, Two-Sided Markets (2SM) and the associated platforms are becoming a reality.
The same-side network effect that is often present in homogeneous voice networks is well known. More the number of users that you know in your circle/network, the more the network is of value to you. However in a typical 2SM, there are 2 sets of users who complement each other's usage, thereby increasing the network effect for an enhanced value for both.
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Analyzing Pricing Strategies
In the smartphone market, the user of the mobile device on one side and the application developers on the other side create strong cross-side network effects to complement each other as is shown in the following figure. One cannot exist without the other. The platforms that provide the glue for these 2 sets of users to interact are particularly important in this context. Success of the platform depends on the number of users on each side and the usage across them.
Here we look intricately at the strategies of the 5 major smartphone/tablet platforms - Apple's iOS powering iPhones and iPads, Google's Android powering smartphones manufactured by many handset makers, Microsoft-Nokia's (MN) Windows 8, RIM's BlackBerry, and Amazon's Kindle Fire.
Pricing is one of the important strategies in a 2SM. Typically, one set of users are subsidized while the other set pays premium depending on the price elasticity of the demand. While Apple subsidizes the developer side and uses applications to attract marquee users who pay premium prices for its gadgets, Google subsidizes both the sides and relies on advertisements for its revenues.
While this pricing strategy of Google - a later entrant in the smartphone market - has delivered the required critical mass in a short time for its Android platform, it is still to be seen whether the mobile advertisement model (the 3rd side) will yield sufficient revenues.
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By making Android open source, Google is looking to dominate volumes and become the platform of choice for the masses. Meanwhile, Apple is fully focused on retaining the interest of its marquee users (who are willing to pay up to `40,000 for its iPhones). Will Apple be able to continually develop unique features to retain the interest of a relatively small number of marquee users? Will the scheduled launch of iPad 3 keep its loyal users interested? With Steve Jobs not at the helm, will it be looking at ways to enlarge the user base, not to bet the risks on only marquee users? Can Indian users expect a toned down version of iPhone or iPad at relatively lower prices in the near future?
Both MN and RIM have attempted straddling the entire price range through a range of device offerings to woo a larger use base, and to take advantage of the network effects. But both MN and RIM have had only limited success with this approach so far. Yet another recent entrant into this battle is Amazon, whose Kindle Fire uses a custom version of Android, and is attempting to take on Apple's iPad through an aggressive pricing strategy (Kindle Fire is priced $300 less than iPad!).
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Designing Applications
In a 2SM, applications and content provide the required glue between users and developers to sustain the cross-side network effects - with the Application Store serving as the meeting place where users find the applications and content they need. Developers try to woo users by striving to design apps that are rated at the top of the downloads' list.
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While Apple's App Store and Google's Android Market Place have clocked more than 500,000 and 350,000 applications, MN and RIM are struggling with about 30,000 applications. Recently, Google renamed its Android Market Place to Android Play Store to drive home the availability of not only apps but also content and games. Generating developers' interest so that they port their best applications first onto the given platform is now the key challenge for device makers if they have to scale.
With Nokia failing to generate enough traction to its Nokia Ovi stores, this baton is now passed to Microsoft, who is expected to energize its developer community to produce innovative applications for its mobile devices. Lack of variety of applications and the associated developer community is one of the reasons for the demise of once-dominant RIM's BlackBerry, which is actively strategizing on gaming apps for differentiation.
Shifting Landscapes
In this rapidly shifting landscape, the dark horse is going to be Amazon, which can leverage its superior content (movies, books, and music) to drive scale for its Kindle Fire devices. Furthermore, Kindle Fire has adopted Android open platform though applications need to be approved and gated by Amazon. This reduces the multi-homing (ie, Android tablets and Kindle Fire) development cost for the developer community and hence improves adoption.
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Apple, so far has been able to use secrecy to successfully prevent envelopment by other platform providers through its proprietary iOS operating system tied to custom hardware. Tight control over the supply chain pioneered by the current CEO Tim Cook has enabled Apple to preserve its quality features, input prices, and maintain the secrecy.
However Google by making its Android OS open source, and offering it almost free, has enabled the device makers such as Samsung to pioneer low-cost manufacturing of Android devices to effectively compete against Apple. Through its effective envelopment strategy, Google is able to improve the feature set of its Android from its earlier versions to a full-blown current Ice Cream Sandwich as is shown in Figure 2 to compete effectively with the newer versions of iPhones and iPads. In contrast to this, MN is likely to adopt a middle path by having a proprietary OS portable across many silicon chips and hence across a wide range of devices to give it the required scale.
It is predicted that due to the economies of scale required for the sustenance of a strong cross-side network effect, the platform space is likely to become an oligopoly - with 3 or 4 major players competing for share. While the offerings on each platform at the stable equilibrium are likely to be non-distinguishable from each other, only way to protect each one's share of the market is to slow down adoption of the rival platform through the use of its arsenal of patents and associated law suits.
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The recent patent litigations across the different stakeholders and the huge patent buyout by Apple, RIM, Microsoft alliance to drive out Android which emerged as winning new entrant through penetration pricing - and the subsequent $12,500 bn acquisition of Motorola Mobility and its patents by Google to protect itself - are examples of this kind of rivalry. The following figure illustrates the patent thicket in a smartphone market.
While the battle for the platform space is on, a new web technology called HTML5 may act as a spoiler, since it permits apps to be developed using web technology in such a way that they are independent of any platform. HTML5 is actively supported by many players, including Facebook, and is starting to make strong inroads into smartphones. Though in its initial stage, watch this space closely to see if web apps will revolutionize the mobile space in the way the PC web browser market was revolutionized by Firefox.
DR V SRIDHAR AND
DR G VENKATESH
The authors are from Sasken Communication Technologies
(Views expressed are personal)
maildqindia@cybermedia.co.in