Jamie Anderson and Martin Zander on

the changing world of mobile devices

Breaking up the
handset value chain
Handset vendors are in for some tough decisions, it is becoming harder
to compete through uniqueness as the value chain for handsets breaks
up. They should instead learn from the PC industry. And if they want to
be solution providers to operators, why not offer mobile devices from
other firms?

LARGE FIRMS SUCH AS MOTOROLA , Ericsson, Nokia and Sie- As mobile network operators place increasing emphasis on serving
mens pushed the frontiers of mobile-handset performance during low-income customers in developing markets, complementary
the late 1980s and into the 1990s, and the industry was considered assets are going to remain a significant driver of competitive advan-
a classic case of vertical integration. These vertical integrators not tage. While the ability to bring a “unique” low-cost handset to
only controlled the design, production and marketing of mobile market will provide a lever for sales in developing markets, the
phones, but also the mobile communications infrastructure ability to build brand equity, construct and use effective supply
business. This was a period in which uniqueness and control of chains, and build and maintain strong relationships with mobile-
the knowledge generated by innovation was a key lever for network operators will also be crucial.
competitive advantage. It is interesting to note that Nokia has not made significant
But the ability of handset vendors to maintain their competitive efforts to bring an ultra-low-cost handset to market, but retains a
perspective

advantage progressively diminished during the 1990s. Although market-leading position in much of the developing world through
there were still relatively few large firms in the industry, it became a strong emphasis on building the complementary assets necessary
increasingly difficult to maintain competitive advantage simply to bolster its product approach. In 2006, Nokia grew handset vol-
through product uniqueness. Rather, the basis for competitive umes in India by 100 percent. With revenues of EUR 2.71 billion,
advantage shifted towards the ability to control the complemen- the company bypassed long-established firms such as Hindustan
tary assets necessary to exploit the knowledge generated by indus- Unilever to become the largest multinational in the country.
try innovation. The key complementary assets at this time included Nokia’s market share in the Indian GSM handset market (in terms
volume manufacturing capabilities, sales and service expertise, of units sold) exceeded 70 percent at the end of the year.
brand building, management of distribution channels and cus-
tomer relationships. From complementary assets to managing power
The ability to meet the stringent device requirements of mobile- We are now witnessing yet another major shift in the mobile
network operators has been a key complementary asset in the handset industry. As was the case in the PC industry in the 1980s
industry for at least the past five years. While many companies and 1990s, the mobile handset industry is today “unbundling” –
have entered the mobile handset device market since the late 1990s, that is, increasingly specialized firms are entering the market with
few have been able to develop the organizational capabilities components and software that are assembled by branded
needed to interface effectively with operators across the full spec- manufacturers and original device manufacturers (ODMs) into
trum of activities required to integrate a handset with increasingly finished devices.
sophisticated service offerings: new service and product develop- While this evolution has been under way for the greater part of
ment and testing, sourcing, logistics, segment and channel man- a decade, it has gathered pace in the past two to three years. There
agement, and servicing. Given the organizational resources seem to be several motivating factors at the heart of this process:
required to deliver across this spectrum of operator activities, it is evolving technological standardization; gains from specialization
perhaps not surprising that more than 80 percent of handset driven by differences in the evolving knowledge bases across the
industry volumes are still dominated by just five players. industry; and gains from trade emerging from the different cap-

40 · Ericsson Business Review 3·2007

Ericsson Business Review 3·2007 · 41
 ...Breaking up the handset value chain
Jamie Anderson and Martin Zander on
the changing world of mobile devices

abilities of specific firms. Powerful buyers – mobile network value has shifted towards the key capabilities of traditional semi-
operators – are also exerting an important influence on the break- conductor companies, giving them cost advantages over traditional
up of the mobile-handset value chain by demanding that manu- players because there is less opportunity for differentiation.
facturers integrate certain standards-based technologies, software,
operating systems and applications. The telecom paradigm
While this trend towards specialization across the handset- The telecom paradigm is dominated by the traditional handset
industry value chain has been under way for some years, the struc- development industry, which has been driven by continuous fea-
ture of this specialization has begun to differ across different tiers ture growth for both new access technologies and multimedia
of the market, especially if we look into mobile platform-related functionality. The semiconductor paradigm emerged as access
activities in the value chain. The industry has witnessed the emer- technologies matured enough to be managed by non-traditional
gence of three distinct structures: handset vendors, whereas the telecom paradigm has been, and still
is, dominated by traditional telecom players such as Nokia, Erics-
1. The semiconductor paradigm son, Qualcomm and Motorola. It is also, by far, the largest market
2. The telecom paradigm both in terms of volumes and value.
3. The computing paradigm Key to success within the telecom paradigm is the ability to
manage new radio-access technologies, system design, integration
A set of basic capabilities is required to enter the mobile-plat- of multimedia functionality and peripherals, operator relations
form industry. But to be successful within each of the above par- and interoperability testing. Innovation is driven by intellectual
adigms, handset vendors need to combine these capabilities with property rights (IPR), with a continuous flow of new and more
paradigm-specific capabilities. No independent mobile-platform complex requirements balanced by the total cost of ownership
provider is today fully successful across the entire market, largely needed to meet end-user device requirements.
due to the almost incompatible requirements of, for example, cost The mobile platforms included in the product offerings are
leadership in the lower segments and a need for differentiation advanced system designs with tightly coupled software and appl-
through cutting-edge technology in the higher segments. This does ication-specific hardware, using an optimized footprint to balance
not exclude the possibility of building synergies between the dif-
ferent paradigms, but doing so will require handset vendors to
optimize their organizational capabilities for the specific market. point
The drive towards specialization has created a set of rules required
for success in each specific paradigm. » One of the biggest decisions
The semiconductor paradigm
for handset vendors will be
whether to compete across all
perspective

The semiconductor paradigm is strongly influenced by the key

capabilities often possessed by traditional semiconductor compa-
nies such as Texas Instruments and Infineon. They compete three paradigms. «
primarily through cost leadership when addressing the entry
segments with their own mobile platforms, and they have histori-
cally been less successful when trying to compete with more mobile handset´s specific requirements for industrial design and
advanced solutions. low power consumption. Other parts of the product offering in
The prime focus within this paradigm is on hardware, and con- the telecom paradigm include physical handset reference designs,
tinuous cost reduction is achieved through process shrinking development boards, development and test tools, as well as differ-
(Moore’s Law-driven innovation), component reduction, vertical ent types of services such as training and support.
integration in the value chain for mobile handsets and horizontal
synergies (economies of scale). The focus of cellular software is The computing paradigm
limited and thus not a differentiating capability. The third paradigm, the computing paradigm, illustrates the
The products provided within the semiconductor paradigm ongoing convergence with the PC industry. Traditional PC-
address the lower segments of the mobile-handset industry (aver- oriented services, such as internet browsing, e-mailing, content
age sales price less than USD 125). These segments have stable soft- creation and content consumption, are being converged into the
ware protocol stacks and limited feature growth since cost aware- mobile handset in mainly two categories of services: business
ness is central to the end-user design. This is currently dominated and multimedia. The key differences between using these services
by GSM and GPRS-enabled products, and we expect EDGE to enter in a traditional mobile handset and in the more advanced
this market in 2008; WCDMA will take a few more years until the smartphones, ultra-mobile PCs and other devices developed for
standard matures to the level of GSM/GPRS today. the computing paradigm are that the devices typically integrate
The semiconductor paradigm has evolved over the past couple simplified text design (touch screen or QWERTY keypad), strong
of years as a result of maturing standards and technologies. The CPU power, large screens and the ability to use third-party

42 · Ericsson Business Review 3·2007

 Product value chain – mobile phones

Silicon and other component manufacturing

Silicon and other component development process
Generic component provisioning Hardware design, dedicated/proprietary or standard
Hardware
Software Standardization body controlled or proprietary protocol stacks,
codecs, network signaling stack, app. environment engines
Specific component provisioning Integration of different software components
Platform Reference design = system + hardware
Software Application & OS
Application suite, open OS
Device provisioning
Product specification End-use device specification
Design and integration Design & integration = Platform + hardware + software apps. (+ open OS)
Manufacturing Physical assembly and production
Distribution

End-user brand value definition

Marketing & sales Brand-owned sales channels to consumers
After sales services Marketing & sales to to operators and wholesale

applications. The ways of working between the players involved China, Taiwan and other countries that have perfected low-cost
in the industry value chain are similar to the PC industry, with manufacturing of modular products such as consumer electronics
a horizontal value chain and several players involved in one and PCs.
product design. As entry barriers fall, profitability is likely to flow away from
Software design and OS are important in the computing para- handset manufacturers to manufacturers of key performance-
digm: it can be seen as the PC industry going mobile, where cel- enhancing components and modules (both hardware and soft-
lular functionality has been reduced to one of many plug-in fea- ware). Likewise, the OS, software applications and microprocessor
tures. Simply put, one could say the computing paradigm has subsystems are likely to be critical in determining the performance
copied the PC industry’s evolution with a strong focus on operating of future mobile devices, so the battle to control these elements
systems and a Megahertz race on the CPU. will be intense. Other component manufacturers, such as manu-
facturers of peripherals and components that eventually overshoot
Implications for vendors the performance requirements of the mass PC market, are unlikely
Given these developments across the three paradigms, any firm to reap substantial profits in the longer term as industry standards
wishing to compete as a mobile-device manufacturer in the future are established and technologies mature.
will need to develop strong system-integration capabilities. But One of the biggest decisions for handset vendors will be whether
like the PC industry, as the mobile handset industry moves towards to compete across all three paradigms. As computer companies
greater specialization, the entry barriers to new players will fall. such as IBM discovered in the 1980s and 1990s, in an industry with
Variable rather than fixed costs will become more significant, and a high degree of multidimensional complexity, it can become dif-
core R&D capability will not be a requirement for competitive ficult to be competitive across increasingly diverging product cat-
advantage. But to select the right partners and integrate supplier egories. IBM’s range included PCs, mini-computers and mainframes
input effectively, successful firms must still have technical know- until the mid-1990s, but this positioning became increasingly
how that overlaps with suppliers. untenable as the capabilities required to compete across all these
The cost structure of non-integrated design or assembly firms segments diverged. IBM shifted its strategy from being based on
tends to be dominated by variable rather than fixed costs. Because end products towards an approach in which it focused on distinct
high fixed costs are what give rise to steep economies of scale, horizontal layers of the value chain, such as semiconductors,
assemblers of modular products are able to compete on relatively microprocessors and disk drives, and a solutions approach in
flat scale curves: small competitors will be able to enjoy similar which it delivers integrated systems from a range of previously
costs to larger ones. There will be a rush of new entrants from competing vendors.

Ericsson Business Review 3·2007 · 43

 ...Breaking up the handset value chain
Jamie Anderson and Martin Zander on
the changing world of mobile devices

Today, about 55 percent of IBM’s revenues come from services, with manufacturer, and of future profits and power distribution in
less than 25 percent coming from hardware. The company recently the industry.
sold its PC manufacturing business to the Lenovo Group, China’s As was the case in the PC industry, “complementary assets,” or
largest PC company. IBM provides an interesting case for the resources that can raise the value of a firm’s technological inn-
mobile-handset vendors of today: if vendors are solutions provid- ovations, will remain important as a means of strengthening a
ers to mobile-network operators, might it not be possible for com- firm’s ability to generate profits. This will be true both for devel-
panies such as Nokia or Motorola actually to offer the mobile oped and developing markets. As the basis for competitive advan-
devices of other firms? It is interesting that the emergence of ven- tage shifts from product differentiation towards complementary
dors such as Taiwan’s HTC was partially the result of the established assets, we may also witness the emergence of a new breed of com-
vendors being unwilling to deliver mobile-network operators a full petitors who offer a portfolio of handsets from different suppliers
spectrum of devices, including Microsoft OS smartphones. – just as has been done in the IT services industry.

What will happen if you don’t?

Whatever the approach chosen by handset vendors in managing
the respective value-chain paradigms, it will become increasingly
‘New kid on the block’
difficult to compete primarily on product functionality in the Apple entered the mobile-handset arena in 2007
mobile-handset industry as different vendors gain access to the with the launch of its iPhone. From a phone-design
same or similar components and modules. First-mover advantage point of view, Apple has entered the industry through
is likely to be short-lived for competitors coming to market with the computer paradigm, with a customized CPU,
higher performing digital-camera modules, higher memory capac- a modular design and a cellular modem. Apple has
ity or LCD screens, as competitors are also likely to be able to not joined the traditional feature-driven race with
the established players, but rather has focused on
source these components within a relatively short period of time.
the end-user experience and optimized the feature
Mobile-handset vendors should learn from the PC industry and
list accordingly.
make sure that their future strategies are not made simply on the
The most unique part of the iPhone approach is
basis of cost optimization or speed to market. While such logic that Apple brings a complete, working, end-to-end
might appear to make compelling sense in the short term, experi- ecosystem: iTunes, providing desirable content to
ence suggests that it can result in a firm outsourcing those elements the user, covering everything from music and
of added value in which most of the industry’s profits will be made podcasts to TV shows and full-length movies. Still,
in the future – and retaining activities in which it is difficult to the iPhone is just one phone, and Apple will need to
maintain long-term advantages over competitors. Witness IBM’s manage operator relations in each individual market,
outsourcing of the PC operating system to Microsoft and chipset apply different regional cellular standards and meet
local regulations.
perspective

to Intel in the 1980s. Value-chain design should be recognized as a

strategic activity that will determine the fate of a mobile-device

the authors
Jamie Anderson (anderson@esmt.org) is senior lecturer in Strategy and Innovation Management with
the European School of Management and Technology, Berlin. His research interest is industry evolution
and value-chain transformation, especially in telecommunication and technology markets. Anderson has
taught and advised mobile-network operators and vendors from around the world, with a recent empha-
sis on helping them to develop strategies for emerging markets.

Martin Zander (martin.zander@ericsson.com) is director and head of Portfolio Management at Ericsson

Mobile Platforms. He has previously worked in a variety of product management and product marketing
positions within the Ericsson Group, both in Sweden and Japan. He has a double Master of Science
degree in technology management and business administration from Lund University, Sweden, and his
main research interests are scenario analysis, industrial structural changes and value-chain evolution.

44 · Ericsson Business Review 3·2007