Tokyo – I’m often asked here what it would take to become a top player in the $400 billion global market for cellphones. Motorola’s troubles offer a once in a decade chance to displace a large supplier and the tools of NRV’s CORPORATE INNOVATION PROJECT show how this can be done.
In CIP, the first step is to look at the numbers through the lens of the North River Cash and Capital Velocity Indices to see how the industry is structured.
Clearly, Motorola’s departure would open a wide sales hole in the market, as the chart shows.
The chart also shows other important features of the market:
- None of Motorola’s competitors stand to benefit from buying its cellphone business, now for sale.
- Any Motorola combination with another low cash velocity performer would fail.
- And none of the top cash velocity performers, like HTC and Apple, have anything to gain by acquiring Motorola.
- The top cash velocity performers are in the premium end of the market and do not suffer Motorola’s price deflation problems.
Private equity could pick up Motorola, but none of these players has the expertise to increase Motorola’s North River Velocity of Cash and Capital Indices, let alone increase them fast enough to put off the Grim Reaper.
This tells us that Motorola is being taken out of the play, one way or another. The way to entry seems clear: market demand is not going down, though it is mature in many markets, and the loss of Motorola will have to be made up by somebody. Why not us?
Ten percent of the global market is $40 billion — nearly twice the size of Apple in 2007 — which certainly is not shabby. Should we enter?
Let’s run thought this from the top as we do in THE CORPORATE INNOVATION PROJECT and see what a successful strategy to take advantage of Motorola’s misery would look like.
The wireless business is entering a period of revolutionary change that is already disrupting global markets. The last such opportunity was the introduction of digital cellular in the mid 1990s. Another one will not emerge for a generation.
This new discontinuity, ushered in by a rapid shift in price-performance―much more bandwidth for much less cost―will offer us a once-in-a-generation chance to establish powerful, profitable, branded positions.
To take advantage of this great opportunity, we need forward-looking, global strategies that are brandable, break cleanly with the cellular past, and are unencumbered by the priorities of today’s industry participants.
In the near future, every person, literally, will be a TV station. With YouTube and Facebook, we are well on the way. We want to play a dominant role in this new market.
We will, therefore, have to look well beyond Google’s text-based advertising and find new, innovative business models for mobile video entertainment. Content providers, similarly will have to monetize the "lost generation," those young viewers who will never own a TV, just as they will never own a landline phone. To prosper, carriers too must understand these needs and learn to profit from them. CIP will have participants from these areas so we have friends from whom we can learn a lot and leverage a lot.
Capturing this fast shifting global market means recognizing that:
- Wireless is on a price-performance curve. Forget the word "cellular." This is a term for a mobile technology whose time on the price-performance curve is already in the past.
- Our North River Third Law of Information is that value always flows to the least regulated. This means that the most open and least proprietary architecture for maximum user value creation always wins.
Apple’s iPhone is so successful because it is part of a complete entertainment management ecosystem, iLife. Apple positions iLife―a three dimensional package that includes hardware (iPhones, iPods, and Macintosh computers), services (iTunes, iMovie, iDVD), and content (the movies, videos, TV and music files of others)―to extract premium value from the markets of others.
We know that we should not―and cannot―simply copy Apple. But we can learn from Apple’s strategy.
- Apple focuses internal investment on key areas of differentiation, leveraging the innovation potential of its suppliers to an extraordinary degree.
- Apple targets segments where competitors are highly profitable, but careless about financial management. These are companies in North River’s "Risk Zone."
Apple’s greatest strength with iPhone is also its greatest weakness: its ecosystem is largely proprietary. Furthermore, carriers and content suppliers view Apple as a threat to their own proprietary ecosytems. Google has correctly identified the appeal of open source software for wireless Internet devices.
To gain a large role in wireless, we must foster an ecosystem where others can fill in the dimensions we cannot. CIP will play a key role here, allowing us to do what we do best and leverage the strength of others to participate profitably in one of the most rapidly inflating realms of cyberspace at minimal investment.
CIP will also help us set our go/no go decision criteria.
The North River Velocity Model also tells us that the sine qua non of market entry is cash and capital velocities high enough to maximize operating free cash flow, giving us the above industry OFCF-to-R&D and OFCF-to-SG&A ratios that will provide the Customer Information Premium we need to maintain a leading position.
To get these velocities, our sales almost certainly have to be direct, without intermediaries, because we cannot generate competitive high cash velocities otherwise.
The gating factor for market entry, therefore, is not technology or alliances, but whether or not we can establish an effective, brandable, direct sales operation. So, to design our market entry strategy, regardless of whatever we do and whatever partnerships we enter, we have to start here.
Thus, CIP allows us to see what it will take to benefit from Motorola’s misery and to do it quickly, reducing costs and preventing us from wasting R&D on something that will not work if we cannot build a direct sales operation.
The first piece is in place.