Mobile Platforms: Integrating Everything

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The days of stand-alone devices may soon be behind us, as mobile platforms integrate functionality into a seamless experience across access venues.  Consumers will access profiles, applications and content in a consistent and intuitive manner whether via smartphone, tablet, desktop computer, or living room television.  At the heart of this are a panoply of cloud-based applications that will become increasingly interlinked, encouraging tighter integration into the platform and interplay across devices.  Against this backdrop, Google and Apple control opposing platforms that will vie for dominance, with Microsoft a viable dark horse candidate for meaningful share.  Stand alone internet services are at long term risk to the manifest destiny of the platforms– like packaged PC software vendors during the salad days of Windows – unless they have defensible advantages.  Similarly, hardware OEMs will find that strict interoperability with the cloud-extended platforms squeezes degrees of freedom for differentiation, and could lose ground to captive or favored rivals with closer hardware/software integration

First: smartphones.  Next: tablets.  Now:  cloud-based lockers for storing and sharing personal files (images, audio, video, documents, etc.).  Meanwhile, Apple and Google sniff around ways to co-opt the living room TV to their ends, an increasingly viable proposition considering the growing penetration of connected home electronics.  The end game is clear – tie devices together into an integrated environment with a common interface paradigm and seamless access to applications and content, offering consumers new functionality and flexibility while erecting enormous barriers to competition, particularly from stand alone devices not tied to a platform ecosystem

iOS and Android are the obvious platform leaders, although they have strikingly different approaches.  Apple’s tight control gives it an advantage in the integration and ease of use of its products, while Google’s inclusiveness allows it to be faster to market with far broader range.  Thus far, Google’s approach has given it a better than 2 to 1 share lead in smartphones, and positions it overtake the dominant iPad as Android tablet implementations improve.  HP’s abrupt withdrawal from WebOS, and RIMMs struggles with its iconoclastic Playbook are testaments to the futility of stand-alone approaches.  Meanwhile, we believe that Microsoft’s Windows 8/Windows Phone – a well designed platform with a strong, dedicated ecosystem – will emerge as a viable third alternative

The integration of platforms across devices will enable new cloud based applications functionality and spur additional integration of applications into platforms.  Categorizing applications into 5 basic groups: general internet, location based services, distributed content, rich media, user generated content, e-commerce and productivity, we see examples in each area of once stand alone applications that are being co-opted by the major platforms – unified messaging, navigation, news alerts, audio streaming, social networking, shopping, document processing, etc..  This phenomenon is reminiscent of the integration of functionality into Windows during the ‘90’s, which laid waste to the packaged software market

We believe that only applications that are truly differentiated and that have built critical mass are safe from the coming wave of platform integration.  The obvious examples are Amazon, with its e-tail business and Facebook, with its 750 million strong user base.  Some less powerful franchises are already under pressure – Yahoo e-mail, Garmin navigation, Shutterfly photo editing and management – and others seem at risk from integrated competition – e.g. PayPal (Google Wallet), Groupon (Google Offers), and Pandora (Apple Genius).   Amongst the dozens of “Web 2.0” companies, we believe that Twitter and OpenTable may have achieved sufficient differentiation and critical mass to survive competition from platform-integrated applications, but that the rest have not

To date, Android licensees have been given liberty to customize the software in pursuit of differentiation for the manufacturer, but at the cost of fragmentation that hampers the ecosystem.  We expect that these degrees of freedom will tighten and that future device differentiation will be hardware based.  Ultimately, we expect the frantic evolution of device specifications to slow, pressuring margins and rewarding scale and efficiency.  The same effect will be true for Microsoft licensees, while Apple will be pressed to sustain its current device cost advantages vs. the two competing ecosystems

In the near term, Apple, with its closed system, enjoys the advantage of tight integration between hardware and software design.  While we believe the benefits of this will lessen over time, Google’s recent acquisition of Motorola Mobility raises the question as to whether it will counter by tightening the integration of its software with its new device business, potentially to the detriment of its partners.  We expect Google to offer unequivocal support to its OEMs and repudiate favoritism to its in house hardware, although it will clearly retain the option value of reversing that policy if it sees fit.  We do expect Google-owned Motorola to become a champion for innovations favored by its parent, such as Google Wallet and Google+

In summary, we expect mobile device platforms to extend their hold across multiple device categories, establishing consistent environments through which consumers will access the large majority of their applications.  Consumers will benefit from powerful integration across access devices and between applications, but will face very high switching costs.  Platform owners, Google, Apple and likely, Microsoft, will capture ever greater value by displacing stand-alone applications with versions integrated to their platforms, to the extent possible.  Only applications with sustainable differentiation and critical mass, such as Amazon e-tail or Facebook, will be resistant to this phenomenon.  Meanwhile, device OEMs will cope with increasing commoditization as user value shifts to the platform and integrated cloud-based applications

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