Paper to be presented at the DRUID Summer Conference 2007


Copenhagen, CBS, Denmark, June 18 - 20, 2007

Joel West San José State University *Michael Mace Rubicon Consulting

Abstract: Innovation competencies are valuable in emergent and high-growth phases of the lifetime of a product or industry segment. For mature industries, researchers have emphasized strengths in operations and execution, with the implication that innovation-oriented companies must enter early in the product lifecycle or not at all. Here we examine the decision of Apple Inc. to enter the mobile handset business. We link the iPhone entry strategy to its historic competencies and the industry context of commodization and convergence. From this we offer conclusions about openness in mobile phones and prospects for a single dominant design for convergence devices.

JEL - codes: O30, L16, L1

Entering a Mature Industry Through Innovation: Apple’s iPhone Strategy
Submitted to DRUID Summer Conference 2007 February 28, 2007 Abstract Innovation competencies are valuable in emergent and high-growth phases of the lifetime of a given product or industry segment. For mature industries, researchers have emphasized strengths in operations and execution, with the implication that innovation-oriented companies must enter early in the product lifecycle or not at all. Here we examine the decision of Apple Inc. to enter the mobile handset business. We link the iPhone entry strategy to its historic competencies and the industry context of commodization and convergence. From this we offer conclusions about openness in mobile phones and prospects for a single dominant design for convergence devices.

Few electronics-based industries have both the same scale and the ongoing rate of technological change as the mobile handset business. The industry was driven initially by rapid adoption in previously unserved major markets — first in Europe, then Japan, the U.S., and China, such that in 2006 more than 1 billion new handsets were sold. At the same time, the industry has seen ongoing technological change, both in the mobile telephone system (through the adoption of new technologies such as SMS, WAP, 3G, camera phones and now mobile TV) and in key component technologies such as LCD screens and rechargeable batteries. At the same time, developed markets have approached saturation as per capita adoption rates have exceeded 75% in these major markets. In such markets, network operators face steadily falling unit prices and must offer new services in hopes of increasing (or maintaining) average revenue per user (ARPU). Handset makers face similar challenges — commoditization of voice handsets and an imperative to offer ever more-capable phones to maintain high average selling prices in developed markets. The few remaining growth markets (such as China and now India) offer little consolation, as they feature highly price sensitive buyers and strong local competition. Throughout, handset makers face a unique distribution system, where even the most strongly branded firm must sell its phones in a given national market through one of three or four local operators: by one estimate, only 0.5% of the handsets sold in the U.S. are not sold directly an operator or its agents.1 Manufacturers thus face both high bargaining power by their main distributors, and the requirement to introduce new technology to align to their distributors’ business models.


Despite such pressures, leadership in the mobile handset business has remained a remarkably stable oligopoly, with today’s market share leaders reflecting successful entry decisions made at the beginning of the cellular era. Motorola invented the portable cell phone in 1973, while both Nokia and Ericsson rode the rapid adoption of Nordic Mobile Telephones in the 1980s. Other European makers have come and gone, while Japanese makers have dominated their home markets but have enjoyed limited export success. The only new firm in the list of 2006 top three manufacturers is Samsung of Korea, which has been in 3rd place since 2001 (Table 1). In 2007, a new entrant unveiled its strategy for challenging this stable oligopoly. Unlike the three long-established handset makers — or challengers like Samsung, Matsushita and LG — this niche player has no manufacturing and has never been a high-volume phone producer. It has pre-announced its product more than a year before entry into the competitive European and Asian markets, giving competitors plenty of time to match its product features. Customers loyal to the incumbents and many analysts dismissed the entry strategy as doomed to fail. However, the new entrant is Apple Inc.,2 and its unreleased iPhone is the industry’s most talked-about product of the year. Despite a lack of telecommunications experience, the company can draw upon core competencies in product innovation and marketing developed over its 30 year history. It also hopes to leverage the market-leading ecosystem it has built for online music distribution. Here we analyze Apple’s market entry strategy in the light of three key constraints: its own competencies, the existing industry value network, and the ongoing efforts to deliver a converged mobile device that equally provides voice, entertainment and the mobile Internet. From this, we offer observations about Apple’s strategies and the future of the convergence market.


no discussion of Apple’s strategy of the past decade would be complete without acknowledging the influence of company founder Steve Jobs. the company has long sought to nurture a vibrant ecosystem. from the Apple III (1979). Its IP strategy — particularly its decision (with a brief exception) to ban clones of its computers — has made it an exemplar for many of a “closed” business model. Macintosh and iPod (Table 1). -3- . the company’s initial success came from the technical innovation of cofounder Steven Wozniak. such as his ability to use software and clear hardware design to reduce chip counts and thus manufacturing parts costs. Lisa (1983) and then the Macintosh (1984). Both his perfectionism and his ability to enforce decisions solved the product execution difficulties that plagued the company during its previous decade (West. Over the past decade. Historic Differentiation Strategy In its early years. while both content providers and third-party add-on suppliers helped drive success of its iPod/iTunes music business. At the same time. who returned to become interim CEO in 1997 and officially CEO in 2000. of which the best known are the Apple II. Apple has had a reputation of aggressively protecting its trademark. the company has combined product innovation with industrial design and clever marketing to gain a reputation far out of proportion to its size or market share. 2002). Software developers were crucial to its Macintosh adoption. Apple’s personal computers increasingly reflected a systems approach. Since its earliest days suing makers of unauthorized Apple II clones. copyrights and other intellectual property. Finally.Apple’s Differentiation Competencies Apple Computer has introduced a series of innovative products that changed the industry.

3 Except for a brief period of authorized cloning (1994-1997). Jobs pushed Apple engineers to produce “insanely great” products that differed substantially from anything marketed before (cf. Beginning with the Macintosh. Under Jobs. Apple’s architecture was less open than the “IBM PC” (later “Wintel” platform) eventually led by Microsoft and Intel. Levy. Meanwhile Microsoft and Intel gladly sold their technology to systems vendors such as IBM and Dell — but vigorously fought rival attempts at competing implementations of their respective de facto standards.Throughout its first decade. the nature and value of openness differs between various stakeholders: suppliers. such launches created suspense through pre-release secrecy and spectacular gestures. culminating in the 1984 introduction of the Macintosh: Product design. But as West (2006) argues. with a molded plastic case instead of a hobbyist-style metal case. which is widely remembered as one of the most successful Super Bowl commercials in history. Apple demonstrated two key marketing-related competencies inextricably linked to co-founder Steve Jobs. Its Apple II is widely credited as the first personal computer designed as a consumer product. Apple’s Partly Open Ecosystem Strategy One criticism of Apple has been that it pursued a “closed” strategy. customers. This culminated in the “1984” advertisement for the Macintosh. Apple operated as a vertically-integrated supplier of operating system software and hardware. -4- . 1994). Apple was able to build excitement with product launch events that were unmatched in the industry until Microsoft’s launch of Windows 95. exclusively available from Apple. end-users and complementors. Public relations. With regards to systems vendors. The marketing itself became a news story.

For the Macintosh. as the leader of the Apple II (and later Macintosh) ecosystem. Apple helped create a market for third-party expansion cards with its Apple II. Such complements are in the platform owner’s interest because they make it more valuable — the “hardware-software paradigm” identified by Katz and Shapiro (1985). 1997.4 Unlike Microsoft. it created a new job category — “software evangelist” — to attract 500 new titles from independent software vendors (ISVs) in the first year after the computers’ introduction (Levy 1994).5 -5- . Apple purchased its microprocessors from third parties who also supplied potential competitors. it allowed internal expansion of its desktop computers through the NuBus and later PCI standards. Its 1984 Macintosh — sold as an information appliance — had no such internal expansion. The Microsoft and Intel role — unintended beneficiaries of IBM’s longstanding market power — marked an exception where proprietary platform leadership was divided between multiple firms. Beginning in 1987. Apple was consistent with the longstanding strategy of computer platform developers such as IBM and Digital Equipment. Bresnahan & Greenstein. In its strategy of controlling the entire platform but encouraging third party software. For hardware. with regards to third-party complements. Apple worked nearly as vigorously to attract a supply of crucial software and hardware. Apple sold only a limited range of software applications and aggressively courted third party suppliers.However. but it promoted external expansion through such industry standard technologies as SCSI. (Moschella. Firewire and USB. which was the largest market for such cards until the 1981 introduction of the IBM PC. 1999). As with nearly all personal computer makers.

6 Until they were cross-pollinated with handheld computers in 1996. 1987-1997: The Lost Decade After the 1987 introduction of the Macintosh II. then Apple’s main revenue-generating product (Linzmayer 1999). In 1985. For decades. And even today. To counter the threat of Windows. However. the first Macintosh with color graphics and internal expansion cards. there’s not a clear correlation between openness and sales in mobile phones.This computer-centric model of complements is not the only approach towards industry standardization. Apple had used its advertising dollars to promote the new Aldus PageMaker software package. but communicated with external devices via well-defined standards. Apple in 1988 filed a lawsuit accusing Microsoft of copying the Macintosh user interface with Windows. Apple’s rate of innovation slowed to eventual stagnation.S. Apple had helped launch the ComputerLand franchise chain in the U. but after 1981 the retailer increasingly used that nationwide network to sell IBM PCs (Moritz 1984). televisions and CD players —were not user extensible.0 software (Woolf. but in 1986 Aldus released a version for the IBM PC that bundled Microsoft’s fledgling Windows 1. such a shift could have reduced Apple’s margins and overall revenue stream to support its R&D budget (which was larger than -6- . Some (including even Bill Gates) once suggested that Microsoft should license its Macintosh technology to PC rivals (Carlton. 1997). with its Apple II product. consumer electronics appliances — such as radios. cell phones more closely followed the appliance model than the computing one. 2002). Apple lost its lawsuit on the strength of a 1985 GUI license that (Apple partisans charge) was extorted by Microsoft under threat of Apple losing its right to ship the Microsoft-developed Basic interpreter for the Apple II. One key problem was losing the loyalty of an ecosystem that turned its attention to the fastergrowing IBM PC platform.

2005). 2005). in the formulation of Moore (2005). In the absence of the strong leader. the company drifted after Jobs left in a 1985 power struggle with successor John Sculley. West. In desperation. the industry leader (West. Apple and Palm being notable failures) and only one major example (Novell) of a hardware company shifting to software — very early in the product lifecycle. Some of the changes were straightforward.5 billion in R&D for cancelled or failed technologies. it moved to embrace de facto or open -7- . the company’s freewheeling culture spiraled out of control. implementation and operations. Apple failed with two attempts to update its aging operating system. and lost another $1 billion in 1997 due to poor inventory management (Carlton. Apple put its primary emphasis on marketing innovation but achieved strategic parity in process innovation. 1997. In minor ways. Turnaround in the Jobs II Era In Steve Jobs’ second turn as CEO. Mobilized to release the Macintosh in 1984. such as outsourcing manufacturing and improving inventory turns to match Dell. the company moved dramatically both to fix operational problems and reassert its innovation leadership. There have been no successful examples of a computer company shifting from a systems to licensing model (with NeXT.Microsoft’s until 1994) (West. Whether or not Apple would have done better as a licensing company. In particular. From 1987-1997. Rather than various proprietary hardware interfaces that it had maintained for 15 years. in December 1996 it purchased NeXT — where Jobs was chairman — and six months later Jobs became de facto CEO of Apple once more. from 1987-1997 it suffered major problems in terms of strategic leadership. the company spent about $1. Apple’s product strategy became more open. In doing so. 2002).

Microsoft buys its microprocessors but designs its own software and hardware.7% of its computer unit sales were through the Apple-owned stores — not counting online stores (Apple Computer. music editing and movie editing. 16. Jobs’s first major step as acting CEO in 1997 was to negotiate an agreement with Microsoft CEO Bill Gates to continue to provide Microsoft Office for the Macintosh. Microsoft’s “Zune” music players emulate Apple’s iPod vertically integrated product strategy (Knowledge@Wharton. it began shipping computers using the same Intel processors as the rest of the PC industry. in other ways. Ironically. it sought to de-emphasize its own AppleTalk networking standard in favor of TCP/IP and other Internet standards. -8- . With its Mac OS X operating system (released in 2001). These included the VGA video connector. In Fiscal Year 2006. as discussed below. Apple also pursued a vertically integrated strategy in its music business. However. Apple has bundled its own web browser. contact manager and music player with its OS. and does not license them to others. Meanwhile. the IEEE-1394 (“Firewire”) bus standard. and the Intel-created Universal Serial Bus (West. and 14 other countries. recent trends have seen increasing convergence in strategies between Apple and Microsoft. presentations. But since that time. Applications. 2006).industry standards. In May 2001. 2006). Apple opened its first retail stores in the US in May 2001. e-mail program. From 1997-2000. For its video game business. shifting distribution away from dealers that primarily sold Wintel machines. 2002). In 2006. and six years later has some 170 stores in four countries. like its rivals Sony and Nintendo. Apple became more vertically integrated and (at least as defined by Chesbrough 2003) less “open” in its innovation strategies: Distribution.S. Apple created its own online stores in the U. photo layout. and developed separate software for page layout.

As a result.7 The iPods have won praise for elegance and ease of use. beginning with a PC-based MP3 player application.3 billion in 2006 revenues (Apple Computer. 2006. Apple also successfully navigated the content landmines that plague any new entertainment media — in this case the “Big Six” (now “Big Four”) music labels. such as cases.5% of $19. 2007). The widespread adoption has brought a broad supply of complementary hardware and accessories. consumer electronics and music industries since it was introduced in 2001. and 29% of the global market. The iPod. Sherman.Successful Entry into Music Jobs’ largest strategic change was to engineer a successful related diversification into the music industry. with music-related products accounting for 49. In the unfamiliar situation of high supplier power. Apple was still able to complete its catalog by attracting all the majors and -9- . 2002). as have its iTunes software and music store download sites. arguably. (Krazit 2006) One key to Apple’s success has been the iPod family of products — designed by Apple but assembled from third-party components by Chinese contract manufacturers (Cf. then its iPod portable music player. home stereos and automobile adapters. with a greater share of revenues (Wolverton. and finally with its iTunes Music Store. It’s shown how a computer can be an integral part of a home entertainment system. 2006). “A High Point for Apple”. is the first “crossover” product from a computer company that genuinely caught on with music and video buffs. in 2006 Apple held roughly 62% unit share in the US market for music players. The diversification has been crucial to Apple’s success. It has also had a major impact on the industry: It’s hard to overstate the impact of the iPod on the computer.

10 - . Apple made three other key strategic decisions: • Systems innovation. key aspects of the convergence idea were developed . which concentrated on either the store or the player. while capping the retail prices for individual songs at $0.99 in the US and EU. including the player and music store.many independents. which meant that songs purchased from Apple could only be used on Apple players. • Closed design. As with its computers. the overall system capabilities and integration set it apart. On the other hand. Even when Apple’s music players did not have the best price or features. respectively. as Jobs argued in an open letter to record companies. 2007). Kobayashi. Apple used a proprietary encryption system for encoding its music downloads.99 or €0. Apple designed an entire system to work well together. and could not coordinate their interaction as closely as Apple could. Apple made its entire system work equally well on Windows as on the Mac — something that it did with its QuickTime media software of the 1990s but not with its LaserWriter laser printers of the 1980s. During the 1980s and early 1990s. the secrecy made it less likely that the encryption would be cracked by hackers (Jobs. However. • Platform agnostic. Desperately Seeking Convergence The original idea of digital convergence — specifically convergence of communications and computing — is credited to a 1977 speech by NEC chairman Koji Kobayashi (cf. 1986). 1992). The latter was later cited by Sculley as one of his major strategic mistakes (Yoffie. the decision created switching costs and helped protect Apple’s market share lead. On the one hand. This was a contrast to most other manufacturers.

answering machine. but were supplanted by dedicated car navigation systems (Canalys. Gordon.PDA systems were popular in Europe for several years. and printer into a single case. In the late 1980s.” 1994. 1994). while . the operators’ best hope to increase billings in those countries is to drive more revenue per user. A company that gets an edge in a new feature can gain a substantial margin and share advantage. phone. 1987. Over time. By the mid-1990s. It died quickly (Johnstone. For example. particular for the more expensive (and more profitable) upper end of the market. with decidedly mixed results. the Razr slim phone helped rescue Motorola’s leadership in the US market. and the US close behind. 2003). A variety of different approaches towards convergence devices have been tried (Table 3). With Europe’s mobile markets saturated. convergence has been a recurring theme in the technology industry for years. 2006). Handset vendors. too. Converged GPS . On the other hand. That means people must be convinced to do more than just talk and send text messages with their mobile phones. Even before mobile phones. convergence was a reality. “From Idiot Box to Information Appliance. both the optimism and the technology of convergence devices have affected the product design strategies of mobile phone makers.and popularized by futurist Nicholas Negroponte and Apple CEO John Sculley (Sculley. feel substantial pressure to add more features to their phones. and strategists like David Yoffie (1997) were offering broad strategies for firms to cope with these changes. converged printer-scanner-fax devices have been quite successful in the computing peripherals market.11 - . Canon offered a converged personal computer called the Navi which incorporated a PC. fax machine. Convergence Imperatives in Mobile Handsets The appeal of convergence to the mobile phone industry is grounded in economics.

and Ericsson banded together to create Symbian. For the US market. sold as the Kyocera 6035 two years later. computing-capable microprocessors. a mobile phone with built-in QWERTY keyboard marked in Europe as a replacement for a small laptop. And presumably a well converged phone might give the handset vendor that made it a major advantage in the market. It ought to create new (data transmission) revenue streams for the operators as users browse the web wirelessly. and was not a major sales success. However. in 1998 Qualcomm shipped the pdQ.Nokia’s lead in cameraphones in Europe helped it solidify its position there.12 - . a joint venture to adapt Psion’s EPOC PDA operating system for use in mobile phones. including LCD screens. and the batteries that both power-hungry components required. Nokia. The next year. the computer weighed 397 grams (about 3. Converging a personal computer and a mobile phone seems like a logical way to get a new feature advantage. In 1998. Psion. . Market Experiments The first five years of convergence mobile phones brought a series of failures and no true marketplace successes. Meanwhile. Motorola. What is widely considered to be the first convergence phone came in 1996. Like the Nokia 9000 it was too large and heavy (285 grams) for a cellphone. Nokia’s failure to emphasize flip phones cost it significant momentum in the US market. as did Qualcomm’s 208 gram follow-on product. when Nokia introduced the Nokia 9000. and found only a small audience. which did not sell well. Ericsson shipped the first mobile phone based on Symbian. the first converged mobile phone based on Palm OS. Some of the problems were — as with the Newton PDA — due to an incomplete understanding of the product category by both producers and users. The products were also limited by the available hardware.5 iPhones). the r380.

because it includes all mobile phones that have a “smartphone” operating system in them. while Symbian OS is the leading smartphone OS. The RIM Blackberry 5810 was the first RIM e-mail device to include a built-in phone.2% of the world market. regardless of whether the customer uses its features. garnering only 8% of overall 2006 smartphone shipments. The year 2002 also saw the first shipments of smartphones based on Windows Mobile (called Pocket PC at the time). Canalys (2007) estimates 2006 smartphone sales as 64 million units — less than 7% of the total market. The first such product was the Handspring Treo 180. cutting the weight nearly in half with the 9300/9500 and the planned E90. both the device size and the design choices began to more closely match what customers wanted. a touchscreen-based smartphone whose early sales in Europe were comparable to what the Treo was doing in the US. In 2002.However. Even that figure is misleading. As with other device makers who witnessed the rents extracted by Microsoft from PC makers. two other important smartphones came to market.13 - . with 67% share (Canalys 2007). The leading smartphone vendor in 2006 was Nokia. most of its smartphone sales come either from phones in more traditional form factors or those (such as the E61/E62) that resemble the RIM BlackBerry. but its dominance in North America had little impact elsewhere in the world. with 50. RIM smartphone sales quickly surpassed those of both Palm and Ericsson (later SonyEricsson). . the major mobile phone vendors were leery of partnering with Microsoft. Since its initial Nokia 9000 smartphone. so it focused on working with second-tier Asian manufacturers eager to gain market entry using Microsoft’s brand and access to key enterprise buyers. the best-integrated (and almost immediately the most popular) Palm OS-based smartphone. However. Nokia has developed 10 subsequent models in its Communicator family. And Ericsson released the p800. by 2001.

The Danger Hiptop youth communicator has been a mild success in the US and several other countries. a converged PDA and game device. Motorola Q.9 as was (on a much smaller scale) the TapWave Zodiac. a merged iPod and a mobile phone. Efforts to create a converged entertainment device have been much less successful. If the customers don’t use the data features. The Nokia N-Gage gaming phone.Market research conducted by Palm in 2004 showed that the vast majority of Symbian customers were unaware that the OS was built into their phones and were not making substantial use of its data features. but is offered by only a single operator and shows no signs of rapid growth. but in Europe they have helped increase SonyEricsson’s share and improved its image as a design leader. Steve Jobs said later that his experience with the Rokr made him realize that Apple needed to completely control the mobile phone’s design in order to be successful — although critics at the time argued that the phone’s music capabilities were deliberately crippled by Apple to avoid cannibalizing iPod sales. launched in 2003. the investment in smartphone software and hardware was largely wasted. the most successful converged phones in terms of actual data usage in the US and Europe are the e-mail devices.8 This is more than an academic distinction. In 2005. They are not widely available in the US.14 - . Nokia E-series. the most successful entertainment phones are probably the SonyEricsson Walkman phones. and Samsung Blackjack. . including the Palm Treo. led by the RIM Blackberry. was a spectacular failure. since the motivation for the industry's investment in smartphones was to drive more use of mobile data. Motorola launched the Rokr. It could hold only about 100 songs. As of 2007. and disappeared from the market quickly. The Blackberry’s basic screen and keyboard layout has been copied by a wide range of competitors. As of early 2007.

lack of support for 3G networks. too big.S. Cingular (which was renamed AT&T in January 2007).Apple’s iPhone Strategy Product Concept While the existence (and name) of the iPhone had been anticipated. .11 To make room for the larger screen. 2007. or more than a dozen other possible features (e. or a niche product. Apple used its iPod success to demand unprecedented control of iPhone distribution. 2007).g.15 - . the phone deleted a dialing keypad. 320x480) of any standard-sized cellphone. Jobs was successful: less than two months later. the term “iPhone” could be found (by Google) on some 60 million pages on the World Wide Web. The greatest criticism about Apple’s strategy was that the phone was “closed”. lack of a user-replaceable battery. Under this screen was a stripped-down version of Apple’s Unix-based OS X operating system.10 Compared to earlier generations of convergence phones. Despite an overwhelming avalanche of free publicity. absence of an expansion slot. The iPhone featured the largest screen (8. with an iPhonespecific user interface that’s claimed to match the ease of use of the Macintosh and iPod. The most user-visible way was that (the initial model of) the iPhone was restricted to a single carrier. and instead uses a touchscreen for dialing and other input functions. Others questioned the lack of tactile feedback from the touchscreen keyboard. While new phones in the U. If the goal was creating interest. many analysts proclaimed the product overpriced. O’Grady. Steve Jobs nonetheless enjoyed tremendous interest when he announced the iPhone at the annual Macworld trade show on January 9. are typically “locked” to a single carrier to assure payback of an initial handset subsidy by the carrier. the phone was not without its detractors. the main difference in the iPhone’s features was the screen.9cm diagonal. As with the original iPod..

. 1999). The leading cell phone vendors have adopted inconsistent and changing strategies in operating systems. At first they embraced a business model styled after the PC market. The other major criticism was that Apple’s phone — unlike its PCs and even its iPods — allowed almost no user-installable software. was more willing to agreed to Apple’s terms that Verizon (24.16 - . first developed by IBM and adapted for minicomputers.4% market share)12 (Sharma et al.. the largest US carrier (26. 2007). New platforms identify a need (i. In this regard. 1997).Cingular. to divided technical leadership where different firms control different parts of the platform (Bresnahan & Greenstein. customer market segment) not met by prior platforms —and win adoption by serving that segment better than other existing alternatives (Bresnahan & Greenstein. workstations and personal computers (Moschella. Several vendors — including Nokia and Motorola — banded together to create Symbian. 1999).g. And controlling the value provided by the platform requires control of the complements (e. Palm licensed its operating system to a spinout . the IBM S/360) in which a single firm controlled the entire platform. winning platforms have shifted from vertically integrated strategies (e.6% market share). a shared operating system that they were all to use. 2000). Platform Strategy Most of the earlier attempts at making convergence phones— as well as other convergence devices such as PDAs and handheld game players — have utilized the general-purpose computing platform strategy.g. Successful platform strategies have been shown to have three key attributes. through application programming interfaces) that make the platform valuable (West and Dedrick. Apple was following a platform strategy distinct from both its own PC and other convergence phones.e. Over time.

and a series of companies in Asia. with its biggest successes coming from HP. as most mobile device browsers have trouble displaying some websites designed for PCs. differences between the mobile web and the PC web have been an ongoing source of confusion for users. Palomäki. and its QuickTime media player. Motorola is a Microsoft and Symbian licensee. Apple claims this will let the iPhone display standard HTML and http websites that were created for personal computers. the mobile phone market appears to be headed toward a situation where the leading vendors will each have their own incompatible operating software (Table 4). This lets Apple leverage some of its desktop software. Microsoft focused on licensing its Windows CE operating system to as many companies as possible. PalmSource. This could be a substantial advantage. which (among other problems) promised a mobile internet experience that it could not deliver (cf. But recently the handset vendors’ OS strategies have become more proprietary. Apple’s strategy is even more proprietary. called S60. but is investing heavily in its own version of Linux. Although mobile browsers have made substantial progress. . It adapted its desktop operating system — in this case an unspecified subset of its Mac OS X desktop operating system — to run the iPhone. Nokia runs a proprietary software layer. Dell. web browser. SonyEricsson runs an incompatible layer called UIQ on its Symbian devices.17 - . 2001. 2004). As of early 2007. and can make proprietary changes to it. dating back to the introduction of the Wireless Application Protocol. Palm now has regained rights to its OS. and it was adopted by several major vendors including Sony and Samsung. on top of its Symbian based phones. including TCP/IP.

one entry opportunity for appliances is the unmet need. or over-the-air). Apple’s overall platform strategy is more akin to a consumer electronics appliance than a general-purpose computer. The idea of providing new functionality through software has been a common thread for computers and video games. . satellite.18 - . Unlike Symbian. and Microsoft. Grindley.13 which has generated considerable controversy (e. radios or (pre-”smartphone”) mobile phones. 1995). The Apple strategy illustrates the controversy between two market conceptions.However. the compact cassette offered portability while the CD offered sound quality (cf. to improve sound quality broadcast audio progressed from AM to FM to digital (via the Internet. as with video recorder or MP3 format. In parallel. As with computing platforms. Another option is superior performance — which is less often used for computing platforms. However. The different pattern of technological change has meant a different strategy for the adoption of new platforms. Apple is not allowing open development of third party applications for the iPhone. Segmentation Strategy Despite predictions of convergence devices taking over the entire electronics industry. Palm. because all competing platforms will incorporate incremental improvements on an ongoing basis. 2007). Claburn. but not for televisions. the fixed standards of consumer appliance make improvements episodic: to compete with vinyl records. The utility of the home consumer electronics device has been provided by the content — whether pre-recorded or broadcast — and thus such platforms have evolved only rarely due to the high switching costs for infrastructure (or consumer library) investments to support a fixed standard. many of the results thus far has been disappointing.g.

DVD (or Blu-ray or HD DVD) players built into videogame consoles. 2007). but without user-installable applications. and any other similar function. The Apple strategy of an appliance device allows for an Internet-enabled web appliance. as venture capitalist Paul Kedrosky wrote: Is Apple serious that it won’t let third-party developers build software for the thing? If so. and put simply.19 - . information management and any other function that could be offered in a portable device. it is not a general purpose extensible computer. communications. handheld game console. an MP3 or video player. the device will fail. a laptop computer. the ideal mobile device would span the various possible roles: computing. With this market conception. (Kedrosky. Both the Microsoft Windows Mobile phones and many of the Symbian phones (particularly those from Nokia) have sought this goal. Some believe this has doomed the iPhone. This has been fueled by both the Kobayashi and Sculley utopian visions. A closed-box consumer electronics mentality will work in music players. distinct group of customers who don’t . entertainment (as with an MP3 player or handheld game console) and information access (such as provided by a PDA).On the one hand is the goal of producing the device that converges the maximum number of functions for a broad mass market. but the future of mobile devices is as a platform. entertainment content. In this case. the device supplants the need for a phone. Strategy consultant Michael Mace (2007) argues that there are three distinct drivers for mobile devices: communications (as with a mobile phone). or Sony’s UMD movie format for its PlayStation Portable. Each driver serves a different. and the product strategies of many firms offering convergence devices — whether it is MP3 players in cell phones. and that requires developers. Others have argued that the design tradeoffs in making devices means that no one product can be optimal on all dimensions.

Mace concluded: Rather than looking for the mobile market to “converge” the way that most PCs converged to Windows. If resources are valuable. From top to bottom: iPod. 1991.want the other drivers.. Here we suggest the complex inter-dependencies of Apple’s iPhone strategy with its existing resources and competencies. then clearly Apple’s greatest asset in entering the convergence phone business relates to the iPod. it’s cars. the iPhone would be an entertainment device with some communication and information capabilities — as with some of the Sony Ericsson Walkman phones — while most smart phones are more focused on communication (Figure 1). then the mobile device market — like many other product categories — would be segmented into different types of users and user needs. I think we should expect mobile devices to diverge into different segments. Grant. As the car market grew in the 1900s. 1991. but instead would be competing with the Walkman phones and other entertainment devices. or from a firm’s capabilities and competencies derived from those resources (Barney. The iPhone might be a poor substitute for a Nokia E90 (which seeks to be a laptop replacement).g.20 - . rare and inimitable. More recent research has emphasized the durable interfirm differences that drive both strategies and the success of these strategies — either from scarce. Finkelstein & Hambrick. The right analogy for the mobile market isn’t PCs. 1998). it stratified into trucks and minivans and SUVs and sports cars and so on. That includes not only its . (Mace 2007) Conformance and Deviation from Earlier Strategies Research on strategic management has traditionally emphasized how managerial discretion allows the manager to choose strategies that maximize a firm’s success (e. If this latter view is correct. inimitable and valuable resources. 1996). Galunic & Rodan. Under this typology. as illustrated by Figure 2.

Entertainment-centric phone. Entertainment segment. . In particular. Existing business model. The company appears to believe that the choice of an entertainment segment and an appliance concept allows it to use a more closed model. As with the iPod or a CD player. Appliance. which has traditionally been focused on creative users as opposed to mainstream business professionals. the market-leading iTunes Music Store is an asset that none of the competing hardware vendors (or their operator customers) have fully replicated. From its segmentation and capabilities — including the lack of phone competencies — the device would be more oriented towards entertainment than a phone. as would concerns about cannibalizing the existing iPod and download sales that comprise half the company’s revenues. reputation and distribution. “Locked” or “closed” strategy.21 - . The company’s business model — particularly the switching costs created by the copy-protection of its music store — encouraged the choice of a closed business model. Leveraging the iPod and iPod ecosystem would mean that Apple’s best opportunity for market entry lay in addressing what Mace (2007) terms as the entertainment segment of the device market that most closely matched existing resources and capabilities. but brand awareness. The leveraging of the iPod ecosystem (particularly music and video downloads) directed Apple towards an iPhone business model. This segment also had a strong affinity with the Macintosh market. and by doing so it can avoid the price wars and commodization facing other mobile phone makers. the device would be more like an appliance than a computer.innovation competencies.

regulatory compliance and working with network operators. For example.” the relevant questions are: Compared to what? And closed to whom? . The choice of a closed strategy (for applications) makes Apple independent of the need to build an ecosystem of third-party software developers. Power of the network operators. Discussion Openness in Mobile Devices Firms face an inherent trade-off in choosing the level of openness in their platform strategies. A completely open strategy will not capture value. Samsung.Lack of a software ecosystem. so the optimal profit is obtain by an intermediate selection (Simcoe. Sony Ericsson). With the iPod. as have Symbian.22 - . while a completely closed one will not create value. Motorola. which is why … everyone hates them. even with help from experienced manufacturers. its phones have still have disadvantages compared to the top four phone makers (Nokia. but more than six years (and 10 Treo models) later. 2006). Although software is often a problem for electronics makers — as with the HP and IBM examples reported by Leonard-Barton (1992) — Apple has long been strong in software.” Need to acquire phone competencies. While Apple’s strategy for the iPhone was criticized as being “closed. However. Microsoft and Palm. The oligopoly power of the mobile phone operators both supports and allows Apple’s model. Apple may need several years to develop and integrate the necessary competencies for selling world-class phones — including radio engineering. it has developed capabilities for designing portable battery-powered devices. As Claburn (2007) wrote: “Only the phone and cable companies want to remain closed. in 2000 PDA maker Handspring sought to become a mobile phone company by releasing an expansion card for its PDA.

particularly in the 1990s. West. 1993. Meanwhile. such licensing did not facilitate entry by competing operating systems vendors (Bresnahan and Greenstein. But this “razor and razor blade” strategy was actually initiated by US cell phone carriers (and later imitated by their overseas counterparts). in which phones were “locked” to a specific network in order to recover the handset subsidy through subsequent monthly service revenues. Its decision to block (or at least restrict) the addition of third party software is unusual for a convergence phone. the home console market has been a cozy oligopoly with only three firms: Sony. console makers use intellectual property law both to decide which complements will be provided. Console makers today attract new adoption by setting a low initial hardware price. Nintendo. which is cross-subsidized by the subsequent revenue stream of videogame sales. Finally. its locking of its copyprotected music downloads to its own product is consistent with its current iPod strategy (later . This raises the question as to whether iPhone users will see the complement that adds the most value as being software (which is not allowed) or content (which is encouraged). increasing competition and presumably reducing buyer prices.23 - . Microsoft. 2006). Since the 2001 exit by Sega. With two major operating systems available for license —Windows and Unix — there were many entry opportunities for both systems vendors and markets of application software. 2002). but would not be considered unusual for an appliance phone or a home electronics product. At the other extreme. Apple’s decision to lock the first model of a popular phone series to a single carrier is comparable to the rollout strategies of many earlier phone families. the most popular computerized entertainment device — videogame consoles — have a largely closed system. Gallagher and Park.The later computer industry was relatively open. 1999. and to extract royalties from complement makers (Sheff. However.

marking only its fourth industry entry after personal computers (1977). and thus far consumers have favored Apple’s integrated (but highswitching-cost) ecosystem over more open alternatives. PDAs (1993) and portable music players (2001). Carlon. To use the typology developed by Leonard-Barton (1992) in her study of Hewlett-Packard and IBM.24 - . Meanwhile. Apple had a consistently high level of technical skills. there have been important changes in Apple’s strategies over the years.14 Many of the strategies are dictated by the core competencies that the company has acquired over its thirty year history — notably in product marketing and innovation.imitated by Microsoft). both as predicted by Leonard-Barton and recounted in various early and later histories of the company (Moritz. Still. It also reflects the competencies not available to Apple — but to its competitors — such as the financial assets and market power of Microsoft and the mobile phone distribution channels of Nokia and Motorola. Apple’s iPhone strategy is of huge importance to Apple. even more so. to judge the success of such a strategy before a single product had been shipped. 1997). the effectiveness of the managerial systems varied dramatically between the two reigns of Steve Jobs as CEO and the intervening period of ineffective leadership. 1984. the innovation empowerment culture became an dysfunctional entitlement. although Apple has sought to both nurture and control its ecosystem since the Apple II days. the iPhone reflects the least nurturing and most controlling strategy to date. Whether this is because of organizational learning (the use of Macintosh complements to support rival platforms) or the product model (a music appliance) is hard to determine from outside the . Absent strong leadership. However. Apple’s Strategy It would be silly to judge a company on the success of a single product strategy — or.

1994). “Strategy formation then becomes a learning process.e. it would appear that the indirect entry can be subdivided into the a priori and ex post facto alignment of a new market as entry to an existing one. But even supporters have questioned whether some definitions of a dominant design are tautological — i. Utterback.25 - . The problem with such a characterization is that this assigns an intentionality (or strategic foresight) to the 2001 market entry strategy that appears to be absent from both accounts of the iPod’s development (Kahney.” As with the Mintzberg critique. Instead. Still. Dominant Design An extensive literature has postulated that new technologies converge onto a single “dominant design” (Anderson & Tushman. A third possible explanation is that the iPhone reflects the intersection of a platform with an increasing number of bundled applications (OS X) with a product category that has seen disappointing third-party software sales. The Apple strategy might appear to match the Bresnahan & Greenstein (1999) typology of indirect entry of a new platform into a contested market.unusually secretive company. the design that dominates is the one that gets dominant market share (Suárez and Uttterback. 2004) and accounts that the decision to enter the phone market dated only from 2005 (Sharma et al. by using the iPod to first serve an untapped need and then extend to cover the convergence device market. in which the absence of perfect a priori information. . 1995). 1986) of PC platform competition than its non-PC rivals. the decision to break from the PC-centric model of platform and application software — to an appliance-centric entertainment device — suggests that Apple is less constrained by the “dominant logic” (in the terms of Prahalad and Bettis. 2007). whereby socalled implementation feeds back to formulation and intentions get modified en route. the utilization of the iPod as a beachhead to convergence devices fits Mintzberg’s (1978: 946) classic definition of an emergent strategy. 1990.

component and min-component stereos: are these all reflecting a single dominant design? Among home phones. But does this allow for the portable variant. while personal computers had different desktop and laptop designs. neither the unified nor segmented model of convergence devices has been proven (or disproven). wall phones and cordless phones. Prior research posits the design was crystallized by the beginning of the 20th century. the typeball (from IBM) and daisywheel (from Xerox)? Closer to the convergence example.The current trajectory of the convergence device market raises a more fundamental question: is it reasonable to assume a priori the emergence of a single converged design? And. So if firms stop experimenting when a design takes the lead. a product category commoditized by the mid-20th century but still subject to product variation. with the Underwood manual desk typewriter. if the definition of a “dominant” design is the common subset across multiple successful product approaches. are they conforming to the dominant design or foreclosing the opportunity to service significant untapped markets? .” clock radio. But there are more example of the latter — multiple winning designs — model than has been emphasized in the dominant design literature. broadcast radios tended to have a volume and tuning knob and some sort of dial — but these are merely examples of form following function. then how does that allow for the main office typewriters of the 1970s . or the electric typewriter? If the dominant design includes typebars. Take the typewriter.26 - . pocket radio. then is it possible for managers to anticipate which features will be common to the ultimate winner and which ones will allow for firm variation and market experimentation? As of today. there are a variety of form factors — desktop radios. Within radios. portable “boom box. three models emerged: desk phones.

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3% Samsung < 5% 5.0% 7.9% < 5% < 5% Matsushita 5. 1985 March 1987 Oct. Jobs returns to Apple Jobs named interim CEO Jobs introduces iMac Apple opens first online store. featured on cover of Time magazine iPhone announced. 2001 Apr.0% 11.000 list price Macintosh introduced at $2.5% 14.0% 30.C. serving U. iTunes Music Store. 1996 Sept. 2005 Oct. Germany and five other countries Apple ships Mac OS X based on NextStep and BSD Unix. 1991 1987 Aug.S iPod. 2003 Oct. 2000) and IDC (2006) § 1994. 2004 Sep. First iPod models introduced at $400 and $500 iTunes Music Store opens in U. its first all-new PC operating system in 17 years First Apple-owned retail stores open near Los Angeles and D. 1984 Sept. 1999 March 2001 May 2001 Oct.K. 2003 Jan. customers Apple U.3% Sony Ericsson§ 10.9% 10.33 - . 2005 Jan.1% Motorola 32. 1983 Jan. iTunes Music Service add Windows support Apple.6% 34.6% LG < 5% < 5% 5. opens first online store outside US Apple Store extended to France. 2007 Segment corporate PC PC PC corporate PC PC PDA PDA corporate corporate PC distribution distribution distribution PC distribution music music music music music music music Milestone Steve Wozniak demonstrates Apple I circuit board Apple introduces Apple II Lisa introduced with $10. Motorola begin phone collaboration Motorola introduces ROKR mobile phone with iTunes Apple adds video to iPod.2% < 5% Source: Dataquest (1994. 2000: Combined share of Sony Ericsson joint venture partners.Figures and Tables Table 1: Durability of global market share by leading mobile phone makers Company 1994 2000 2006 Nokia 21. company renamed from “Apple Computer” to “Apple” .8% NEC 8.4% 5. Table 2: Key milestones in Apple product strategies Date April 1976 April 1977 Jan. 1997 May 1998 Nov.6% 21.S.500 Co-founder Steve Jobs leaves Apple to found NeXT First Macintosh with color and built-in expansion slots First PowerBook laptop computer John Sculley touts “Knowledge Navigator” product concept Newton MessagePad introduced Apple purchases NeXT for NextStep operating system. 1997 May 1998 Jan. 1993 Dec.

1999 March 1999 Oct. 5000.0 shipped in H/PC (“Handheld PC”) devices from NEC and Casio pdQ. pocket-sized pen-based PDAs Nokia Communicator 9000. phone with stylus and keyboard based on Palm OS First BlackBerry e-mail device with voice telephony built in p800 touchscreen-based smartphone with Symbian OS Thera is first US phone shipped with Microsoft Pocket PC operating system N-Gage game/phone device Acquires Handspring and its Treo phone line ROKR phone with support for Apple’s iTunes Music Store iPhone touchscreen handset . 2007 Company NEC Xerox Psion Apple AT&T Apple Sharp Palm Computing Nokia Microsoft Qualcomm Research in Motion Ericsson Samsung Nokia Psion Handspring Research in Motion Ericsson Audiovox Nokia Palm Motorola Apple Product Announcement Chairman/CEO touts CCC. keyboard-based smartphone with Symbian OS Exits PDA business Treo 180. 1993 March 1996 1996 Nov. 1996 Sept. 1998 Feb. 2001 2001 2001 May 2002 2003 June 2003 Sept. Researcher Alan Kay publishes paper advocating handheld computer (“DynaBook”) Psion Organizer.Table 3: Evolution of convergence phones Date 1967 1972 1984 1987 April 1993 Aug. first Palm OS-based cell phone First BlackBerry keyboard-based e-mail appliance Pen-based Ericsson R380 is first smartphone with Symbian OS MP3 Phone supports eight downloadable songs Nokia Communicator 9210. 1999 2000 July 2001 Oct. 1993 Sept. keyboard-based database CEO John Sculley touts “Knowledge Navigator” product concept EO pen-based PDA Newton MessagePad pen-based PDA Sharp PI-3000 (“Zaurus”) pen-based PDA Palm 1000.34 - . keyboard-based cell phone Windows CE 1. 2005 Jan.

0 mp 112 g 106mm 54mm 15mm 2.2 S60 n.8GB X 2. WCDMA X Symbian OS 9.5” 320x240 BlackBerry Thumb keyboard GSM+EDGE proprietary BlackBerry 64mb microSD X X 180 g 112mm 58mm 23mm 2.3 mp 135 g 114mm 61mm 11.7mm 3. HSDPA X Symbian OS 9. 104mm 50mm 16mm 2. microSD X X 3.4 Palm OS 128mb SD X X 1.8” 320x240 BlackBerry Thumb keyboard GSM.8” 320x320 BlackBerry Thumb keyboard CDMA.0 Windows CE 192 mb MiniSD X 1.35 - . EvDO Windows Mobile 5.4” 320x240 BlackBerry Thumb keyboard CDMA.1 UIQ 4GB X - 210 g 132mm 57mm 20mm 4.r.r. n.r.6” 240x320 Candy bar 10 key GSM.r. microSD X X - 115 g 116mm 64mm 11.5” 480x320 Tablet Touchscreen GSM+GPRS X Modified Mac OS X 4GB. WCDMA Symbian OS 9.2 mp 150 g 117mm 70mm 13.1a S60 n.0” 800x352 Clamshell Mini keyboard GSM.0 mp n. HSDPA proprietary n.5mm 2.Table 4: Comparison of mobile device platforms Vendor Model Intro date Weight Height Width Thickness Screen size Screen resolution Form factor Input mode Network WiFi OS Downloadable apps Memory capacity Memory card MP3 Java Camera Apple iPhone 7-Jan-2007 Samsung SGH-F700 12-Feb-2007 Sony Ericsson W950 13-Feb-2006 Nokia E90 7-Feb-2007 Nokia E61i 12-Feb-2007 Research in Motion 12-Feb-2007 Palm 15-May-2006 Motorola Q 16-May-2006 BlackBerry 8800 Treo 700p 134 g 114mm 66mm 14mm 2.3 mp .r.8” 440x240 Slide-out Mini keyboard GSM.9mm 2. microSD X X 5. EvDO Palm OS 5.

36 - .Figure 1: Contrasting segments for convergence devices Source: Adapted from Mace (2007) .

Inc. it lost key copyright cases in the 1980s.37 - . 2 Apple Computer. 9. 1977. but operators still strongly influence phone choices through their subsidies of consumer phone purchases. when (concurrent with the iPhone introduction) it filed papers with the state and federal authorities announcing its name change to Apple Inc. 3 IBM’s initial goals was not to create an open architecture system in which 100%-compatible computers would be available from competitors. However. opening the door to reverse- .Figure 2: Linkages of Apple’s iPhone strategy Notes 1 A higher proportion of handsets are independently sold in Europe. 2007. was incorporated in California on Jan. 3. and thus fiercely protected the BIOS code on its ROMs. a name it retained until Jan.

with both color television and vinyl record standards defined as the result of proprietary competition (cf. most forget that proprietary standards were the norm in the 20th century consumer electronics industry. having sold. But in most cases. 6 While the VCR standards competition is fresh in the minds of middle-aged researchers.38 - . 2007. 4 Like IBM. former Palm marketing manager.” (“NGage”. Senior VP of the iPod Division. “The N-Gage was not as commercially popular as Nokia [predicted]. 5 NEC entered the PC market by selling a kit that incorporated its own 8-bit microprocessor (Kobayashi 1986). both IBM (with its PowerPC chips) and Acorn (with its Acron RISC Microprocessor — ARM) never used teir own chips in their own PC models. One problem Nokia faced was attracting video games to a new gaming . In 2004. Fadell was promoted to VP of iPod Engineering and in 2006. HP and other system vendors. an independent contractor who was hired to lead the hardware design team after bringing the idea to Apple (e.engineered and rapid adoption of fully-compatible “IBM PC clones” (Chposky & Leonsis 1988. 2007). Langlois 1992). February 26. Ironically. Apple sought to sell its own branded peripherals instead of third-party competitors. by the end of 2005. 2004). 7 The original idea for the iPod was attributed Tony Fadell. Chandler.. such competitors faced few competitive barriers other than branding and distribution. Kahney. Motorola was a maker of Macintosh clones using its PowerPC chip from 1996-1997.g. 8 9 Personal correspondence. 2001). less than half of the minimum six million units that had been Nokia's target.

12 The industry trade association estimated about 229 million subscribers at the end of 2006.1 million (23. 13 Application downloading for competitors is not unlimited. Cingular reported 61 million subscribers. to combat computer virus propagation in 2004 Symbian phased in a requirement that all downloadable applications to have digital checksum and be authenticated by Symbian — posing a barrier to entry by tiny software developers such as shareware authors.0 million (10. monitors and applications) for its personal computers.1%) and T-Mobile with 25. .6% split between various smaller carriers. hard disks.39 - . Less than one-forth of the 60 million pages mention “Cisco.” and 96% of these pages also mention Apple. 14 Particularly during the peak of the Macintosh proprietary model from 1984-1997. but does not include the ability to make voice calls over mobile phone networks.platform in competition with three major consoles and one (soon to be two) portable game platforms from console makers. followed by Verizon with 56. with the remaining 14. but these were almost entirely to support (and extract rents from) its PC industry strategy.2” screen with a 800x480 resolution. SprintNextel with 53. 11 The Nokia 770 WiFi tablet has a 4. 10 Cisco briefly sued Apple claiming prior rights to the “iPhone” trademark.9%). Cingular and T-Mobile used the European GSM standard. while Verizon and Sprint used Qualcomm’s CDMA standard. Apple also sold a wide range of accessory hardware and software (including printers. but the two parties settled six weeks later on undisclosed terms.8 million. For example.

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