How can phone makers differentiate in a mobile 2.0 world?

Android’s open-source platform has been a huge success for Google. but it’s leaving phone makers at a loss. I sat in on a discussion recently with a handset maker that said Android has affected its ability to differentiate. The fear is that Android’s adoption will mimic Microsoft Windows in the PC industry, where hardware manufacturers are relegated to just hardware.

As Rich Wong described in a previous post, the mobile model has changed. In Mobile 1.0, operators were king and handset makers effectively serviced the operators. Differentiation was primarily in un-commoditized hardware, custom user interfaces, operator relationships and manufacturing economies of scale. Software was fragmented but mostly an afterthought. And operators, being the guardian of the industry, were the primary interface to the consumer.

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In 2010, with Mobile 2.0, the model has changed. You don’t distribute content to customers by scoring the sought-after Verizon deal; you do it through an app store. Consumers don’t choose a phone based on Bluetooth and megapixels; they choose based on apps and services. Smartphone platforms have become the brand to the consumer; it’s no longer the Motorola Razr, it’s Google Android.

To survive in this changed market, handset makers will have to make some hard choices.

1. Finding the right market focus

Handset makers have to make a choice: Do they focus on lower-end and lower-margin devices, where consumers don’t expect as many apps and services, or do they play in the smartphone segment, where they need a services strategy? It’s ok to play on both sides, but it’s not ok to straddle the line. And if they decide to rely on the platform or ecosystem provider for service, then they don’t need to waste precious dollars and time promoting full-scale developer programs and setting up a deep Bay Area presence. Save us developers some noise. (Remember T-Mobile’s shut down of its developer program).

2. Figuring out how to maintain an independent brand

As beautiful as Android is, taking the Android OS is effectively giving users to Google, and the story isn’t going to change with Windows Mobile 7. Granted, Google Maps is probably the industry’s must-have application, but the long-term winners will be a handset maker’s enemies: Google, Facebook, Yahoo, Apple, and Microsoft are the identity managers, and they will eventually own that key consumer billing relationship.

It’s ok to launch devices that are Android, Windows Mobile 7 or other operating systems tied with services (for example, a future Facebook mobile OS), but in the long term, and on the majority of their phones, handset makers need to extend their own services to the consumer. They can either do that by launching their own smartphone-like OS, like Samsung has done with BADA, or partnering with a services-independent OS provider like Symbian or LiMo — and, no, I’m not saying those are necessarily the right ones.

3. Doubling down on HTML5

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With all the recent discussion around HTML5, I probably don’t need to evangelize the platform. What the industry is lacking is new HTML5 frameworks for rich internet applications (see Sencha’s recent $14M raise) and the developer’s creativity to think of web applications as rich native experiences (see Google’s HTML5Rocks).

As publishers strive for development efficiency, HTML5 enables easier cross-platform applications. Native development will continue to exist in the short-term, but the 80/20 rule applies, and unfortunately, if a handset maker isn’t one of those 80% platforms that is generating the revenue, developers are not going to write native applications for that platform.

4. Working out effective billing models

As mentioned before, for developers, it’s all about revenue, so to the extent that handset makers can offer unique billing methods and integrated ad networks, developers will build.

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It’s critical that these companies build web app stores where web applications (bookmarks) can be submitted (see Google I/O’s announcement of a web app store for Chromium) and offer as many billing models, methods, mechanisms as possible. Windows Mobile 7’s try-before-you buy SDKs is a great first step, and Apple’s integration of Quattro Wireless into iOS is another good step, but developers need more. We need to make money.

5. Keeping the geometry simple

In the past, Nokia was notorious for building devices with different keyboard alignments. Some have become industry standard and others were very unusual. Whereas the challenge for the consumer was getting comfortable with the key alignment, for developers it’s much more complicated. Great strides have been made to make platforms more cross-compatible to reduce overall porting efforts but the problem isn’t the software, it’s the screen.

Apple’s brilliance with a true write once, run anywhere is the result of geometry. Each screen, regardless of form-factor, has maintained a geometric ratio — meaning an application written for the original iPhone can pixel-double and run on every single Apple mobile device, and maybe even the Apple TV! If the battle for developers is about revenue then platform uniformity and coverage is key.

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6. When to stop racing and watch the margin

While I was at Kodak Mobile in 2004, I witnessed the cameraphone megapixel race. Today, the megahertz race has emerged. Handset makers have adopted an hourglass strategy, where there is high-end and low-end hardware. High-end devices are supposed to provide high-end margins, but they’re not. 1 GHz is more than plenty, especially with all the other hardware optimization happening with the application processor. 800 MHz is probably enough and would likely result in better battery life. I don’t know what the floor is, but we’re definitely close to the required ceiling.

7. Creating a desktop presence

It sounds counter-intuitive for a mobile handset maker to build out a strong desktop presence, but it’s all about the billing relationship. Apple’s 60M+ cached credit cards enable a one-click purchase experiences with all of their services. Presently that includes iTunes content, but longer term that may also include premium services (Email++) and so forth. Owning that billing relationship is what the identity managers intend to take, but device makers have ultimate control, since they own the devices.

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If apps and services are the new business model, then it’s all about seamlessly capturing that user’s billing identity in desktop saturated markets.

8. Leveraging connected devices

In a recent automotive survey, consumers said they cared more about their phones than their cars. So phone manufacturers have a lot to gain by focusing on the connected lifestyle. If they can’t differentiate on core mobile device user experiences such as email and browsing, they can focus on differentiating in connected experiences, such as enabling the phone to connect device to TVs or to serve as the smart-hub in cars, especially since most of these manufacturers are the same company.

9. Offering data packs

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Apps and services are getting more and more data hungry, and there’s no end in sight. With AT&T and other operators introducing data caps, operators now have the power to flat or zero-rate certain apps and services, bringing them potentially back into the forefront of mobile content. So device makers have to think ahead and work with operators to mitigate these concerns for their developers. Offering unlimited data or zero-rating capabilities for certain apps and services could become a new handset differentiator.

10. Considering exclusive deals with “micro-brand” apps

Core apps are those that you use every day and are often part of the platform, but the cool apps are the unique apps users get addicted to. For my Dad, it’s his calculator app, since he’s a math professor. For me, it’s the nutrition app, since I’ve made getting healthy the priority. Each category within the app store has micro-brands for different segments of users. Evernote has cemented itself as one of the leading note-taking applications, and Pandora as the leading mobile internet radio service — the list goes on.

So if it’s all about the content and services, handset makers may want to make bets on exclusives. This may sound counter-intuitive, and I’m not sure how many large publishers would opt-in, but the reality is that the majority of micro-brands would probably consider time or feature-based platform exclusives.

11. Preparing for a flip in the revenue-share model

Today Blackberry may be one of the few device makers that not only gets paid per device but also manages to receive a subscriber data revenue-share from the operator. But as more operators relegate service creation to platforms and handset manufacturers, the model will flip, and phone makers will have to pay a revenue-share to the operators — potentially meaning that a phone maker’s presence in an operator store will be dictated by how much revenue that manufacturer can generate for that operator.

Raj Singh has worked in all aspects of mobile over the past 11 years. He is currently a co-founder of YumYum Labs, which is developing applications in mobile health. Most recently, he was the Vice President of Business Development for Skyfire, a mobile browser that supports full Flash rendering. Previously, he consulted with Dell Mobile, assisting them with their global SMS and WAP strategy. Prior to Dell, he co-founded venture-funded Veeker, NBC’s mobile video citizen journalism service and boot-strapped ToneThis, CNET’s top downloaded ringtone creation product. He has also worked in product management, engineering, strategy and consulting roles for Kodak Mobile, Cellmania, MobiTV, PlayPhone, Tellme, Samsung, Hungama Mobile and Antenna Software. His personal projects include GameChalk, an SMS multi-player game service, and Pubwalk, an LBS bar-hopping service. Raj is also a mobile advisor to numerous companies. including Movoxx, Nearverse, Buzzd, Textopoly and several VCs within the valley. He’ll be moderating the Lessons Learned in Monetization panel at VentureBeat’s upcoming MobileBeat 2010 conference.

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