Theory

Motorola—like HTC—is thus a bellwether for makers of Android phones, whose sales have now caught up with those of the iPhone—about 300,000 a day worldwide. Some industry analysts doubt that it will be able to create a big market for its devices and make enough profits before cheaper providers move in. If they are right, the smartphone market may eventually become like that for personal computers: a handful of huge competitors with tiny margins. The difference will be that these firms will hail from around the world rather than being mainly American.

via Motorola: Breaking up | The Economist.

When I argued that the meek shall inherit Android, the profitability data was the core evidence. That argument, made in August, was:

So here we have the real challenge to Android:  partnership with defeated incumbents whose ability to build profitable and differentiated products is hamstrung by the licensing model and whose incentives to move up the steep trajectory of necessary improvements are limited.

In other words, Android’s licensees won’t have the profits or the motivation to spend on R&D so as to make exceptionally competitive products at a time when being competitive is what matters most.

The surge in emerging market Android entrants has been the latest setback for branded Android vendors. What should be the long term strategy for companies like Motorola and Samsung?

Paradoxically, Motorola, being the weaker, has the best chance for successful recovery. The clue lies in both what Palm (now HP) and Microsoft did: starting with a clean sheet of paper and building their own platforms.

This might seem futile given the network effects that current platforms are gaining, and there is a big execution risk, but the alternative is no alternative at all. The big incumbents cannot fight against the clone makers.

Technically, building a new platform is not as daunting a challenge as it used to be. Palm, a small company, managed to do it in about 2 years. Microsoft, a large company, took 18 months. Google built theirs in about 2 years.

They all took advantage of existing code bases (Linux or Windows CE). They also rely on web standards for their APIs (.NET or Java or HTML5).

The challenge is bigger in attracting developers, though again, some core set of apps and developers can be obtained on the promise of brand power alone. Intel and Nokia is using this power for MeeGo.

Motorola's advantage today is its new autonomy and singular focus on mobility. It has hit the reset button. There is no better time to be courageous and there are no sunk costs to confuse investment priorities. Android was a necessary stop-gap measure and the Droid timing was very good (before the clones and before iPhone distribution expanded). However, now would be a good time to start building a Motorola platform for the future.

There is an assumption floating around the debates in this and other forums that the "battle" between mobile platforms is a land grab. The unspoken implication of this assumption is that once a user is captured she is permanently locked into the chosen platform never to move to another again as long as she lives.

For example @dutchtender remarked:

many people's first smart phone will be android. android can take them "cradle to grave." android will be there with a higher end solutions when they can afford it

This is a strong but untested claim. It may be true but we owe it a bit of thought.

A long time ago I tried to model platform growth is by using a version of Metcalfe's law. I suggested that the value of a network is proportional to n log (n) where n is number of nodes in that network[1]. This was somewhat based on common sense as it measures the possible links between n nodes with degradation due to the limits of social graphs.

The value the network creates is what developers as well as all the other participants in the ecosystem are able to tap into. The platform vendor gets to capture a share as well of course. As the value grows it tends to create network effects or a self-reinforcing cycle.

What I'm saying then is that we can treat a platform as a network, where each node is linked to another node by the commonality of experience.

The proxy of the model was Windows. Twenty years ago, having Windows meant that you could exchange files with other Windows users simulating a sort of network protocol. You could also ask your peer group for help and get software tips and new consumption ideas. So the more people used Windows the more likely it was that you also had to use it. Avoiding Windows limited your ability to be part of productive society (this is no longer true by the way, which is one reason Microsoft is in trouble).

If we fast forward to the mobile post-PC world, when it comes to platforms the shared experience is that of apps. People can communicate their app experiences and their usage better if they have the same platform. They can also learn from each other how to better use the products and how to solve problems. The more people that use a mobile platform, them more value it generates for platform participants.

The other factor determining value is that a platform also creates sunk costs. Usually called "investments" by users these are costs that are incurred and have a potential for future value. This means that the apps purchased and time spent learning and adjusting to the platform are sunk costs which users are reluctant to abandon. (Notwithstanding the fact that as sunk, these costs should be ignored when comparing the value of another platform,--psychology is what keeps users loyal even if it's not in their best interest.) This "sunk" factor of value is not as powerful as the sharing of experiences value since it does not scale with the number of users. That cost is a constant multiplier on top of the n log (n).

So the overall "value" of a platform is K n log(n). Where K is the stickiness of sunk costs.

Can this be stated plainly without the math?

When you compare two platforms you have to ask how contiguous users (n) grows and how stickiness (K) grows. The issue with fragmentation is that it actually cuts n. Many people won't be able to share experiences if their devices don't work the same way. Same with geographic density of a platform. If, as was the case with Symbian, there are few segments that became saturated with the platform then n is reduced.

The issue with a lack of paid or compelling apps is that it cuts stickiness, so that you don't have any sunk costs. Similarly the presence of ported or common apps means that K is reduced for any single platform. Nokia's Symbian has a serious problem with both consistency and with commonality of experience. RIMM depends too much on the commonality of messaging which is quickly becoming a commodity due to portability of the experience.

So in the end it's not just about how big the user base n is (which is the only thing that is measurable). It's how contiguous n is and how compelling the content.

This is too sketchy a model to be practically applied but it offers a thought experiment: does any given platform have

• A large, contiguous user base with strong concentrations of users in the same demographic or psychographic segments?
• A significant set of unique content (apps) which require costs from the user (in terms of data, time or cash)

It's not a clear cut case in my mind that Android benefits from these as much as iOS does. If that's the case, users are more likely to be moving on a one-way street between these two: from Android to iOS and not vice versa. The same thought experiment can be engaged in between any two platform contenders.

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[1] Metcalfe's law is actually an n*n growth curve but recent research indicates that social networks scale in value as n log (n).

Since I spend most of my time thinking about what will happen, at the end of each year, rather than looking forward I like to look back to see how wrong I've been. The great thing about being wrong is that you learn something. Especially if you use a foundational theory to tie concepts together. Theory building is all about finding anomalies that adjust and improve it.

Fortunately, exactly one year ago, on December 30 2009 I wrote an article asking if Android was disruptive. It turned out to be the right question to ask for 2010.

What have I learned since?

My main argument in late 2009 was aimed at the reaction of the recently launched Nexus One. A product hailed as disruptive to mobile operators. I did not see it that way. In that respect I was right. The distribution juggernaut any phone platform faces stopped the Nexus One dead in its tracks.

I wrote:

Here’s the problem: since mobile broadband is by all accounts not good enough, it cannot be disrupted. Operators are very critical in building out this new mobile computing future and they are investing and will reap rewards. Bitpipe models will only emerge after 4G when there will be ubiquitous high speed networks and competition will shift away from coverage and more to price and convenience of plans.

What is happening instead of operator disruption is that mobile voice which is more than good enough is being disrupted. Businesses built around mobile voice (e.g. handset vendors who have not developed a viable business model around data) will simply evaporate and their profits will condense around entrants who have mobile computing platforms.

So the operators are as strong as ever. But the Android platform lived to fight on, regardless of the Nexus one. And it grew in ways I did not anticipate. I had expected integrated players to maintain a large share because they would be able to improve the product more rapidly than modular vendors (and assuming that the product needed improving).

Google is moving on this opportunity but they are not executing in a way that ensures they control the future platform due to the their being on the wrong side of the modular/integrated dichotomy.

So Android grew but it's not yet creating profits. It is perhaps laying the foundation for future profits and defending existing profits for Google but it is not yet a big profit center[1]. That is a cause for worry. Disruptors need to be hungry for profits and patient for growth.

I concluded:

Android will disrupt but I expect it will take 10 to 15 years. The life cycle of a new global network generation rollout is about 10 years. We’re in the middle stage of the 3G cycle that traces its beginnings to early this decade. 4G will take another 10 years.

Given what's happened this year does this forecast still hold?

Mainly yes. I stand by the notion that operators will be in the driver's seat for a few years to come. However Android has grown in an unexpected way: adoption by unbranded or relatively unknown vendors selling in emerging markets.

The Grey (market) Elephant in the room

Until 2010, it was very difficult to sell a phone without a recognizable brand. This is because brands helped overcome purchase anxiety for those buying a device for the first time. Brands mean trust and the lack of brand meant risk. Those who cannot afford to make purchase mistakes are more likely to lean on brands than the affluent.

But 2010 has seen a shift away from device brand value and more toward platform and function value. This shift was largely unforeseen and is very disruptive.

The fact one in three phones are sold from "other" unbranded vendors like ZTE, Huawei and G'Five is a bombshell. Right now they're all selling voice products, but I predict that will not last long.

All those vendors are likely to adopt Android and in doing so will explode the low end of the market. They may even crush the branded voice-oriented market.

This growth can be slowed by operators but market forces will be very strong. These devices sell in grey markets and are often unlicensed, unbranded, untaxed and unregulated (and may even be illegal due to the absence of IMEI numbers).

So this is the real wild card for 2011: unbranded devices running Android could be the PC clones of the post-PC era. Will this phenomenon last or will the brands fight back? If they fight, the only weapon they could wield is innovation.

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[1] Mobile efforts at Google are generating over $1 billion in revenues per quarter however these efforts include various other assets including AdMob which was acquired for $750 million. Furthermore, the headcount for Android and these other efforts is not small. I've heard as many as 3000 people are devoted to Google's mobile efforts.

With a market share of 31.5 percent, Nokia is still the largest vendor of handsets in the Indian market, followed by Chinese brand G'Five with about 10 percent share, IDC said on Wednesday.

via PCWorld.

No, I haven't heard of G'Five either. The article goes on to say that there are 68 new vendors in the market accounting for 41% of total shipments. There were only five new vendors with a share of 1% in the first quarter of 2008.

It was not long ago that Nokia held over 70% of the Indian market. That market is now larger but the share for Nokia has dropped by half at least. The share was not lost to Samsung but to 63 new entrants. They managed to capture 40% of the market, roughly equal to what Nokia lost.

These new vendors will launch Android phones next year or the year after that. According to IDC, Android obtained 9.4% in the third quarter up from 2.9% y/y. The number of Android models went from 2 to 19 in the same time frame.

What does this mean for Your favorite mobile OS?

I'm sure many will use the Indian example as evidence of the inevitable ubiquity of Android. However, I would note that data networks are still very sparse in India and 3G has not reached a level of penetration that makes mobile broadband a common experience [citation needed].

The funny thing is that this lack of connectivity is not likely to be an obstacle to Android as it wasn't an obstacle to Symbian in the pre-3G era in Europe. More than half of Nokia's smartphones were selling without data plans in Europe well into 2009. Nearly all were selling without data in Africa, Middle East and India. Smartphones without data plans are just high end feature phones. They can be used for picture/video taking, listening to music/video, FM radio and, if they have a keyboard, for more productive text messaging. In emerging markets dual SIMs, FM radio and removable storage are killer features. Mobile browsing isn't.

A lack of broadband is however an obstacle to the iPhone. Here's why:

With the exception of those seeking "luxury" phones (a very small minority), the iPhone is too expensive in markets without subsidy. That's because the price Apple sets is very high (€630 or well over $800 at retail). This is not entirely because the product is inherently more expensive. Much of that extra cost is margin for Apple. What makes it popular is that much of that extra cost is paid by the operator who accounts for it as a subsidy. Don't pity the operator though. That subsidy is there for a reason: because the product entices users to data-oriented consumption at a higher monthly service fee.

The entire business model for the iPhone is to wrap a high-ARPU mobile broadband service plan with shiny metal and glass.

Put another way, an iPhone without a broadband connection is just a voice phone with an integrated iPod touch. You're better off getting a cheap phone and an iPod, or maybe an Android or Nokia phone.

When the iPhone 3G launched in India in 2008 with a price near $1000 it flopped. Many were quick to note that Apple did not understand the market. However few pointed out that the "3G" in the product's name was not just a marketing ploy. It was its Raison d'être.

To study the impact of iPhone in emerging markets you need to first plot out the penetration of mobile broadband.

When reading the comments disputing the possible end of the voice-phone era I'm reminded of similar comments disputing the end of the PDA era.

Although the Apple Newton pioneered the market in 1992 and John Sculley came up with the acronym, the Newton did not sell in significant volumes. It wasn't until 1997 with the Palm Pilot that the PDA market took off. Microsoft quickly followed with a licensed OS based on Windows CE. In 2001 Microsoft launched the Pocket PC brand to cement its attack on the PDA market. The first phones using a Microsoft OS were using something called Pocket PC Phone Edition. The first Nokia smartphones (Communicators) were built like mobile PDAs.

The logic was quite compelling. The original PDA was built to mobilize contacts, calendars and notes. They replaced bulky paper organizers and seamlessly synced to PC productivity software like Outlook. It was a compelling product in the US where small business customers needed to keep track of hundreds of contacts. Users could even 'beam' contacts to each other via infrared. The idea of adding a phone function to the device made sense insofar as contacts could be immediately dialed from the contact app rather than typed into another device's phone keypad.

By the early 2000's PDAs were forecast to sell by the hundreds of millions. There were millions of dedicated users who downloaded apps and thousands of developers being courted by platform builders. Palm even invented the word "ecosystem" as it refers to mobile platforms.

However, I remember reading sites dedicated to this community and there were many people who rejected the concept of a PDA with an integrated mobile phone. They liked the fact that the PDA was not bundled with a phone plan. They upgraded PDAs in a different cycle from phones and besides, phones are for talking and PDAs were for something else.  It was even more difficult to justify the conflation of the two products when considering the corporate purchasing of PDAs. PDAs were procured by IT departments and phones came with contracts that were managed by a different department.

What's a device vendor to do? The most avid customers of PDAs did not like the idea of burdening the product with a phone. RIM was doing its thing with moving pagers to include voice, but that was a different job to be done. The story is picked up here by this comment:

I was hired by RIM in 1999 just before they began work on their first phone .... Coming from a two-way pager background, RIM decided that phones should have two-way push synchronization of pretty much everything that Exchange provided along with a limited WML browser. The general thought was that phones would never have sufficient power density or radios sufficient bandwidth to allow anything more. That was incredibly predictably wrong, but it's how things went down.

Along with RIM was Ericsson, Palm, Motorola, and Qualcomm. Motorola came from a similar background as RIM and went on to build very similar devices. Both Nokia and Ericsson had come from phones and had decided feature phones should have far more sophisticated PDA functions. Palm started with PDAs then moved to the phones, but adamantly dismissed ideas like wireless synchronization for years making their first attempts at smart phone far more like early Nokia Communicators than early Blackberrys...

So the point is that all these companies were fighting over what amounts to overgrown PDAs with phones and wireless stacks strapped on. Everyone assumed power density was no where even close to what was needed for general computing, that a full featured browser and heavy duty Internet services were impossible due to bandwidth and latency. Take a look at how our Java expert groups named standards, how people at the time talked about what features smart phones should have, and its clear that no one thought an iPhone was possible. Even Danger, which eventually went on to work on to create Windows Phone 7 and Android, was just working on a better Blackberry.

via: shacknews

But what does this have to do with the future of voice-phones?

The problem is that the vendors that lost this game failed because they listened to their customers. Like with PDAs or with the original mobile phones or first generation of PCs, early adopters are not the audience that should be consulted on how to improve the product.

Early Windows Mobile users were ecstatic about the platform and rejected new UI metaphors because they wanted a "mobile Windows". Palm fans stuck with the PalmOS even though it was well past its shelf date in the Treo because they treasured the original PDA metaphors.

Every company paying attention to the market in 2005 would have been eagerly pursuing corporate buyers of PDAs and aiming complex products at enthusiastic PDA users.

And yet, non-consumers should also not be trusted with their opinions. Most early surveys would show that the vast majority of consumers found that mobile phones were not good value for the money. Later the same audience would declare that smartphones were not worth buying.

There are many voice-only users in the world who are happy with their products and not interested in any new options.

So what's a marketer to do?

If you can't ask early adopters and you can't ask non-consumers for hints then where can clues be found?

What history shows is that consumers have been happy to trade up to technology that offers more option value.

• Television went from cheap/free over-the-air broadcast with limited channel options to expensive cable with large option value in channels. Even if most of those options went unused, they are still valued.
• Telephony went from low cost reliable landlines to high cost, less reliable but with much more option valuable mobility. Having the option to call a person vs. calling a place (where a person might be) changed the calculation of whether you make the call. Calling became much more popular.
• Data as well went from metered dialup to unmetered high option valued broadband. From a luxury, to the least likely service an unemployed user might give up.
• Emerging market users hungered for mobile phones even though they cost more than several months' wages because they gave access to information and increased the option value of their labor.

Each of these huge technology transitions came associated with increased costs for the consumer, but that cost went toward the purchase of a far larger option value.

The problem is that users cannot calculate option value in their minds when faced with a market research questionnaire. How can they envision all the ways they would use a new product they've never used before? How can they "get it" without observing it in use or spending time thinking of "how they would use it" or asking someone who tried it? In a nutshell, users are willing to pay for option value but can't envision or quantify this value without observing a finished, polished product in use.

This is the problem faced today by branded phone vendors. Asking or observing current users of smartphones does not provide any incentive to sell low end versions. Asking or observing non-consumers seems to indicate no interest in newfangled complex or costly products.

But the calculus that must be made is one of option value. Does the new product offer significant option value? Will this option value be easily realized? This is not easy to determine, but it's a method that is far more promising than asking users their opinion.

The PDA was not a product that was introduced by the incumbent computer vendors because their customers did not ask for it. Once established, the PDA was not replaced by a product that PDA users asked for either.

Smartphones are following this well trodden path. The high end devices are evolving into computer replacements nobody asked for (but everybody will use). The low end products are adding data option value to voice-oriented users who never asked for anything more.

Toshiba plant to make LCD panels for Apple: report | Reuters.

Apple will invest in a portion of the investment for the factory, the Nikkei said.

This is one of the more interesting news items I've seen for a while.

[UPDATE] Toshiba denies rumor Apple will invest in mobile display subsidiary

There was a time when Apple designed and owned factories. From an interview with John Sculley:

That went all the way through to the systems when he built the Macintosh factory. It was supposed to be the first automated factory but what it really was a final assembly and test factory with a  pick-to-pack robotic automation. It is not as novel today as it was 25 years ago, but I can remember when the CEO of General Motors along with  Ross Perot came out just to look at the  Macintosh factory. All we were doing was final assembly and test but it was done so beautifully. It was as well thought through in design as a factory--a lights out factory requiring many people--as the products were.

During the 90s the manufacturing function moved outside Apple's ownership umbrella. It was more economical, more flexible and more scaleable to outsource manufacturing to Asia. The time has come to rethink this.

For the past few decades outsourced manufacturing has grown in scale and scope as prices fell and quality increased. However there are signs that this global web of suppliers and assemblers is reaching a point of disruptive change.

Press attention has focused on labor practices, pay structures and the enormity of factory towns where literally millions of workers are employed and housed. As is often the case press attention only hints at some causality and as such misses the point. Journalists looking for a story about child labor or suicidal workers might serve us better by putting the spotlight on the fact that factory towns are not competitive.

centralized Manufacturing is not good enough for the coming mobile computing disruption

The real problem with Chinese factory towns is that they are not flexible enough. By concentrating facilities and workers, electronics manufacturers have improved on measures of scale and quality but are still only able to ramp up and down on individual products once or twice per year. This does not meet the need to increase responsiveness to markets and the pace of development and design. It also reaches some critical overweight mass. Capacity cannot double or triple again to meet the need of six billion consumers. There are signs that the business model must change.

Typically a product is born in Product Marketing, progresses through Design, R&D and then to Manufacturing and finally to Sales. Each of these stages of development has to be re-started for each new product, often in a pipeline fashion. However, some of these stages are increasing their cycle times while others are at their limits. This limits the throughput of the whole chain. If, for example, R&D can put out two product designs in the space it takes for one Sales cycle then they need to be tasked with different product while they wait for "capacity" in Sales to catch up.

My contention is that the bottleneck in device product development is now manufacturing. The evidence is that Apple (among many others) cannot meet demand. Sometimes it's a lack of components, but often there is a forecast error and capacity is simply not allocated. What I also see is that this bottleneck is not solvable with the current value chain architecture. When there are 5 billion consumers of platform devices, centralized factory town manufacturing does not match the cycle time of either design or of consumption.

The answer to low capacity is more investment in more lines of production, more workers and more suppliers. However the problem is that this takes time. The window of opportunity for a product is less than six months.

Consider the iPhone product cycle. A new variant goes into development 18 months to two years before it's launched. It's ready for manufacturing a few months before launch. The R&D team is off making the next version long before the product hits any shelves. The cycle time for R&D changes unpredictably. Sometimes it slips, sometimes it may be shorter because the changes are minor. Perhaps marketing sees the need to react to changing market conditions. However, manufacturing plods along at an inflexible rate.

How can it be fixed?

I'm not an expert in this area, but as a student of disruption I see signs of opportunity to re-engineer the manufacturing business model. The patterns from history are plain to see: Centralized systems get broken down and re-aligned with new bases of competition. Value chains disintegrate and re-integrate as profit algorithms change.

The new algorithm says you need to ramp production quickly (up and down) and to increase "product turns" from one to two each year. Each ramp needs to be even bigger than they are now. Maybe by a factor of two. Products should be built closer to where they are consumed to drive costs and delays out of transportation and tariffs. Carbon footprints need to be reduced.

Sounds daunting. But the rewards could be enormous. The business model may need re-definition. By owning the means of production, the value added can be shifted to another point (i.e. production can be run at a loss in exchange for higher margins elsewhere.)

All this requires capital. Lots of it. Apple has it. I see no better use for it than to re-define production as a synchronized development module.

It's time to look at owning factories again.

In the latest version of Android, Google shifted from bitmaps to vector rendering for maps.  The shift is probably more a function of available processing power on the device than a strategic shift to position value on the device rather than in the cloud. Vector maps, which are much more efficient in terms of bandwidth and local storage, have been the choice for in-car navigators but Google has always been using bitmap tiles which are fetched from a server and delivered only if the device is using a data connection. The downside for vectors is that they require a bit more local processing power.

I doubt that Google's move to vectors is part of a shift to more app-centered/edge-of-network strategy.

How is this relevant?

Google has been riding a wave of re-centralization of value toward the center of the network as broadband made the cloud feasible. Keep in mind that Microsoft rode a wave of de-centralization as value moved to the PC and away from the mainframe. As intelligence was pushed to the edge, Microsoft accrued value from enabling the edge as a locus of productivity. This is no small thing.

Then came apps.

The supernova that is the App Store illuminated the possibility that apps are perhaps a "pushback" on the center. Like all good disruptions this was unforeseen: Apple built the store and the apps sold; by the billions. Apple joined the world in a scramble to react. Something profound was happening, but the very brightness of this explosive growth blinds us to what is actually going on.

My hypothesis is that there is a tug-of-war going on between the mobile cloud and the device-at-the-edge. Both will become better and neither is good enough. Technology roadmaps point to both higher availability of local storage/processing power as well as faster, cheaper and more ubiquitous mobile broadband. So technology insight by itself is not enough to give us a clue to the outcome.

What I would focus on is what is more natural for the user.  Note that Twitter and Facebook both have better interfaces with their apps than they do with their browser interfaces. That and innovations in game interaction points out that apps are as much a disruption of UI metaphors as they are of the locus of power in the network. It would not surprise me if people end up spending a larger part of their lives tethered to device-enabled social media, "firing" the PC from the job of social interaction.

If we believe the app will grow as the preferred interface for the web (and I'm leaning in that direction) then the implications are potentially harmful to Google. Google does not "do" interfaces. Their strategic assumption has been that interfaces are commodities. The browser is the universal interface. Perhaps HTML5 will offer sustenance to the concept, but it's not a panacea. Web apps have a long way to go to become competitive with hand-crafted app UIs. (While web apps have been possible for iPhone since its inception, developers vote en-masse for apps and almost zero popular web apps exist. Ditto for Flash-to-app interface ports.)

This brings us to focus on the asymmetry of business models.

the App Internet

What we end up with is the "app internet": a potential disruption of the browser-as-interface and the re-integration of the user experience around the device. Because the iTunes store allows money to be attached to new interface innovations, developers follow and compete on better interfaces rather than on access to the back end.  The asymmetry ensues from the fact that by attaching profit to the point where the user touches the screen, Apple took the basis of competition for developers away from the cloud.

In other words, the point where the electrical charge of the human skin is detected is suddenly the exact location of value capture from mobile computing.

Of course, Google is responding, but since they did not focus on seamless and curated experiences, developers are not seeing returns for investment in interfaces at the touch point. As a consequence, Google apps developers seek ad revenues. In turn, this is a road that leads to less innovation in interfaces and more innovation in network-dependent services.

I sense a distinct asymmetry in app trajectories between the platforms due to core business model choices. Asymmetric competition causes the great fortunes to be made and great fortunes to be lost.

Yesterday I attended the first meeting of the Forum for Growth and Innovation. It's an initiative where practitioners of Clayton's Christensen's theory of innovation can review new academic research before it's published.

The Forum has another goal: to disseminate and propagate key learnings and ideas. As a keen student of the theory and a blogger, I am eager to provide a gateway for you, my audience, to this management theory.

My modus operandi has been to discuss an industry or a set of competitors in great detail while occasionally stepping back and suggesting a cause for the patterns of behavior we are witnessing. More often than not, the causes are described very well by the theories in Christensen's writings.

There are cases where the theory does not seem to match. That's actually the most exciting part of this process. Exception (or anomaly) handling is what allows the theory to evolve and improve.

Yesterday's event focused on M&A. It's a cliché to say that M&A is a recipe for failure but there are recipes to follow that minimize the chance of failure. The forum debated these recipes and we were treated to the wisdom from those who learned the hard way what works and what doesn't. (For example, the ex-CEOs of Best Buy, Arrow Electronics and a senior executive who worked under Jack Welch at GE.)

What I came away with was a new respect for the counter-intuitive and contradictory nature of acquisition integration. What often makes sense on paper like synergies or new growth can quickly turn to a loss of the core business. Recipes for deciding what to integrate and what to keep autonomous are an active area of research.

For this and many other reasons, it's easy to understand why Apple is reluctant to make large acquisitions. The market discounts Apple's cash because it is expected to evaporate in a mis-guided acquisition (since that's what management has shown a propensity to do in most other large US companies.)

I've written about why I think Apple's cash is worth more than other companies' cash (e.g. Microsoft.) Apple's reluctance to make large acquisitions and no record of such should provide some hope.

However, I don't think that reluctance is simply a coincidence or a lack of suitable candidates for acquisition. I think it's more a result of the company's processes and priorities. As long as the team in charge is focused on the details of execution and integration, and as long as acquisitions are complex and fraught with unknowable risk and lack of control, I see no acquisition in Apple's future.

I've been traveling the past few days and did not have access to substantial enough bandwidth to make meaningful contributions to the blog.

However, I will be online for the next few days and will catch up.

One observation I had while visiting App World is how apps are affecting the future of television. The notion of single screen viewing is rapidly receding. In the UK among certain demographics, half of the viewers watch TV while interacting with a "companion" screen. This figure is significant in other markets as well.

The consequences of this dual-screen experience could be profound. More profound than what PVR technology enabled. What I would like to think about is whether the dual-screen experience enables new jobs-to-be-done for TV (e.g. "social" TV) vs. what PVR did which was make TV watching "better".

The key question is whether solitary TV viewing is a different job from accompanied viewing.

If viewing while in the company of others is a distinctly different job from solitary viewing then a dual-screen approach will allow interaction with a companion even if they are not in the same room. This implies that the more natural interaction for TV viewers is not with the programming but with other viewers.

On the other hand, solitary viewing may be hired for a very different job. Not all programming is suitable for a social experience. Producers need to carefully categorize their production according to what jobs it's getting hired for.

An even deeper strategic question is whether programs themselves should be designed with social interaction in mind, and if so, is TV production something that should be built in an inter-dependent way with the devices and the second screen in mind? Does there need to be a "studio system" for TV where production, talent and distribution are under one over-arching controller?

This discussion parallels that around the re-integration of the value chains where Apple participates. Perhaps the challenge for the re-invention of TV is really to what extent can any one participant in the value network orchestrate an integrated approach.

More on this topic to follow.

The release of the iPhone is rightly acclaimed as a watershed event in the history of telecom. It was a sensation. But it was also a product that was widely underestimated and dismissed. Even today expert opinion is divided. The critics of the product transitioned directly from labeling it a superfluous bauble to an obvious and copyable sustaining innovation. Advocates of the product describe it as revolutionary and dazzling with the potential for capturing significant profit share due to premium pricing and positioning.

So which is it?

I'll argue that it's none of the above. The iPhone is not superfluous, not easily copied, not revolutionary and not a premium product. What it is is disruptive.

First, we have to quickly define disruptive potential.

A product is disruptive if it competes with an existing, incumbent set of products on a new basis. It competes along a new measure of performance. That means it's either "low end" and hence cheaper, simpler, more modular and conformable, or it creates a "new market" where completely new measures of performance or quality are relevant.

In both "low end" and "new market" disruptions the product is usually wrapped in a business model that insulates it from incumbent response due to inherent asymmetries. Incumbents will find the economics of the entrant product unattractive and will be motivated to ignore it or actively avoid copying it.

The consequences of disruptive product entires are often catastrophic for the incumbents because, over time, the disruptor product vacuums up all the profits in the industry, robbing the incumbents of the fuel to respond by the time they become motivated to do so. In essence, the transfer of value to the new basis of competition happens so slowly that the threat is imperceptible until it's too late.

If we look at this definition, it's startling that the iPhone does not seem to fit.

As a phone, it's not cheaper, nor modular and hence not "low end". It did not create a new market.  As a phone, although it did recruit more regular phone users into becoming smartphone users, it was not the first or last phone to do so. Its phone business model was not a radical departure. It was not ignored by the mobile phone incumbents who reacted with various degrees of urgency and vigor. It was actively copied in every way from the UI to the ecosystem to the pricing model and distribution.

The only thing that seems to have happened according to the disruptive formula was the transfer of profits from incumbents to Apple, at least temporarily.

So the iPhone seems to be correctly classified as a sustaining innovation. Something that moves the phone market forward and which, except for a temporary misallocation of profits, will entrench the incumbents after they manage to copy it effectively.

However, here is where we have to dig a little deeper.

Market analysis easily becomes myopic when looking only at a market defined by a product. I've argued in the past that strategic insight comes from looking at products that cross over their market boundaries. Especially products that are hired to do different jobs than the same products in their categories. The iPod may seem like an MP3 player but it caused catastrophic profit collapse in multiple industries. It knocked out the CD business, it crippled the component audio system "Hi-Fi" industry, it razed the music retail business and affected the entire music value chain. It's still pounding at the gates of video and TV production. And, almost as a side-show, it crushed the Walkman.

Even though it was a music player, the MP3 device market was the smallest target for the iPod. It turned out to be far more dangerous to ancillary industries. The reason is subtle: it competed as an integrated ecosystem. You hired the iPod to serve you music everywhere, not just in your living room. And it did the job in an integrated way from source to earbuds taking what was a hodgepodge of modular components built around analog music and smoothly integrated them to deliver music in new, non-consuming contexts.

The lesson is therefore that when looking at the iPhone one has to look at ancillary industries not just at phones.

Phones have always been a component in a wider inter-related telecom value network. Even today they are often called "terminals" in the industry meaning that they are the end points of a network. Similar to the PC, the iPhone enables a migration of intelligence away from the center toward the edge of the network resulting in a de-valuation of the network itself.

I argue that the real disruption of mobile computing (i.e. iPhone) is made possible not by the smartphone technologies but by mobile broadband. Once broadband became mobile with 3G the smartphone could shift its focus (jobs it's hired to do) from voice to data. That shift is disruptive to incumbents because they built their businesses around operator distribution and operator service economics. With apps, mobile computing brings with it services which allow all communications to be independent of operators. Selling ringtones, maps, email and video-on-demand are all dead business plans today. But operators clung on to these hopes for many years and forced vendors to comply to this strategy.

The incumbents relied so much on the telecom value chain, where the value flows from the monthly service charge, that they would not deploy technologies or business models that were asymmetric to operator business models. This is the root cause for Nokia and Samsung and Motorola and LG "missing the boat" on smartphones. All the vendors had the pieces of technology on their shelves. But when they took these technologies to their customers, the customers rejected the package.

This is why entrants like RIM and Apple could easily gain a foothold and grow. They had modest volumes, sold new concepts like business email and new UIs with iconic designs, but did not go after the core business model. This is similar to how iPod/iTunes got a toehold with the record labels. By the time the disruption took hold, operators were addicted to the new high-ARPU being generated even though they were all pure bitpipe plans. A bird in the hand is worth two in the bush, so the new device brands stuck.

Do the incumbents still have time to respond effectively? It's less and less likely. They cannot build the new computing ecosystem without the distribution power of operators. Note that iPhone 'clones' in Android are still sold via operators and that nobody is interested in making either iPod touch clones or iPad clones sold independent of the operator channel/subsidy model. This is not because of technical or economic reasons but because of a lack of distribution (and lack of integrated content).

When you step back and look at the phone in the context of the network business model as well as the shifts in consumer jobs to be done you realize the potential is far greater than taking share from incumbents. The iPhone is not divided into a portfolio of different phones, but it's a part of a portfolio of new mobile computing products. It just happens to be the only one which still depends on the cellular operator distribution network.

Seen as part of a new mobile computing paradigm and following the trajectory of the mainframe, mini-computer, PC and laptop, the iPhone is an essential, non-superfluous device for a vast population of new users.

Seen as an integrated app ecosystem with strong network effects, it's not easily copied. Responses that only account for it as a glass and metal object of desire will fall way short of being competitive. As the hardware was always available to competitors, it's not a revolution in hardware or even in user experience.

Most importantly, seen as a computing alternative merged with a communication appliance, it and its siblings are not premium products. The pricing and service structure around it make it seem a low cost alternative for solving the jobs it's hired to do.

In other words, it is as disruptive as it gets.

So the SEC is investigating analysts who peddle "channel checks" for violation of securities laws. Former SEC chairman Paul Atkins summarizes the law as follows:

"Insider trading basically comes down to where you know or ought to know that the person from whom you're getting this information has a duty to someone else to keep it confidential. If you go in and pay the mail clerk to give you special information, that's not proper."

This is perhaps newsworthy. But the real news is that information that comes from sources that cannot be verified should not be trusted and certainly not valued.

Here's why: if someone holds information that is non-public they automatically treat it as more valuable. It's more valuable because it's not something everyone has. It's not valuable because it's accurate. By definition, that accuracy cannot be proven so the assumption of its value is based entirely on exclusivity. So valuable perhaps that you can even sell it, and surely many do.

However, simply not being public makes is no more likely to be accurate. You have a situation where people ascribe more value to something that is equally (and sometimes even more) inaccurate as background noise.

Beware of anyone offering non-public information to a larger audience. The data and the person's ethics are both suspect.

The proof comes every quarter: those who rely on inside info are no better and often worse in predicting fundamental performance.