Case Study 2

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Timing of Entry From PDAs to Smart Phones: The Evolution of an Industry In the Beginning In 1966, Gene Roddenberry’s “ Star Trek” introduced what some have called the first personal digital assistant ( PDA) design mock- up. There were to be no paper or pencils on the Enterprise. Crew members wrote on electronic tablets and used a handheld tricorder to access, process, and display information. 1 Such portable processing power sparked the imagination of millions and may well have been the inspiration for today’s smart phones. However, it was not until the early 1990s that technology began to deliver on this inspiration. At that time, most speculators believed that pen- based comput-ing would be the next wave of the future. In 1993, Forrester Research Inc. pre-dicted that 298,000 handheld computers would be shipped that year, a number that would increase to 4 million by 1996. BIS Strategic Decisions estimated that 96,000 PDAs would be shipped in 1993 and 2.6 million units by 1997. In early 1994, industry observers were predicting that 1994 would be the “ year of the pen,” 2 and that the two leading operating systems, Microsoft’s Pen for Windows and GO’s PenPoint, were poised to battle for the spoils. From 1990 to 1993, a small flurry of companies entered PDA development. The players included well- known computer makers such as Apple, IBM, Hewlett- Packard, and Motorola, as well as start- ups like GO Corporation, EO Inc. ( which was bought by AT& T), and Momenta. Because they used pen- based input and because of their size, PDAs and their success rested upon the evolution of several enabling technologies, including handwriting recognition software, modems, and the miniaturization of power and memory. Enabling Technologies Several of these enabling technologies were not ready for use in PDA manufac-ture by 1993. Handwriting recognition software was a particular problem. Though accuracy rates had approached 95 percent, users still found the 5 per-cent inaccuracy to be very unsettling. Modems also posed problems. Many felt that the key feature of a PDA would be wireless connectivity. But in the early 1990s, modems were nicknamed “ bricks” because they were large and heavy; achieving wireless connectivity in a PDA would have doubled the weight and size of most devices. 3 Constraints on processing power and battery life also compromised the per-formance and/ or size of the PDA. Even to replicate streamlined versions of office software products required significantly more memory and storage than was found on a typical electronic organizer. Additional memory and storage added to both the size and cost of the device. Greater processing power also required greater battery power, which affected the size of the end product. Market Confusion about PDAs Compounding the technological problems was a lack of market awareness about the functionality and potential functionality of pen- based PDAs. For PDAs to become viable in the market, companies had to sell large volumes to achieve the necessary economies of scale and recoup development costs. But the market was still very immature in the early 1990s. PDAs were expensive compared with desk-top systems, and potential users were not sure about their performance, their compatibility with their current computer systems, or the availability of software. Not only were user needs poorly addressed, but there also was a question about who the major market users would be. Some companies clearly envisioned the PDA as a mass- market consumer electronics device, while others saw it primarily as a tool for mobile executives. Still another group of companies envisioned the PDA for particular industries (“ vertical markets”) as a more specialized device that could allow inventory scanning or in- field sales estimates. The Shakeout In 1993, only a small market of early adopters were placing orders for the new PDAs. Then, Microsoft announced it would be entering the pen- based arena with its product, WinPad. Upon the announcement, many of the early customers withdrew their orders to see what Microsoft was going to do. Microsoft’s previ-ous experience in the computer industry was a strong indicator that if Microsoft entered PDAs, it would likely control the dominant standard and its products would have the greatest software compatibility. Furthermore, if a PDA had a Microsoft interface and software, it would capitalize on consumers’ current train-ing and experience with Microsoft products. As it turned out, however, Microsoft did not become serious about pen- based computing for several years, so its announcement stalled the market acceptance of PDA technology. Many of the pen- based PDA companies began to falter by 1994. While several of them had made great technological progress and had working products, they did not yet have a revenue base coming in for the products, so many of the companies began to run out of capital. Momenta had been a front- runner in the pen- based computing market and had attracted several big- name executives ( e. g.,Delbert Yocam of Apple Computer), but it ran out of money and was dissolved by the fall of 1992. The breaking point for GO came in 1994, when after months of negoti-ations, Compaq chose to work with Microsoft instead of GO for its pen- based computers. Having lost $ 75 million, the company was bought by AT& T and absorbed into AT& T’s EO Personal Communicator division. AT& T shut down the project shortly thereafter, noting that the handheld market had not turned out as well as it had expected, and projected that the industry was leaning more toward the smart cellular phones concept. 4 As of 1996, price and features had still not reached an appropriate convergence for most vendors or users. AT& T, Compaq, IBM, Motorola, NCR, and Toshiba had all invested millions of dollars in developing pen computing hardware and software, but by 1996 they had all either scaled back dramatically or abandoned the market. 5 Surviving Companies, Forging a PDA Standard Some companies and/ or products survived the shakeout. Many of the vendors who focused on specialized devices for vertical markets weathered the storm quite well. Telxon, Psion, Fujitsu, Casio, and Sharp all continued to thrive. The big winner, however, was a relatively late entrant called Palm Computing. The founder of PalmPilot, Jeff Hawkins, set out to design a product that was fast and simple, and would sell for less than $ 300. The product did not debut until January 1996, but 350,000 units were sold by the end of 1996, and a million units were sold within 18 months of its release. The PalmPilot had attracted the support of some 12,000 developers by January 1999,6 and by the end of 1999, it controlled 77 percent of the worldwide market share for PDAs, and Microsoft’s Windows CE operating system had a worldwide share of only 13 percent. It appeared that a dominant design in PDAs had finally emerged. Palm’s advantage was not to be long- lived, however. The collapse of the tech-sector bubble at the end of the decade sent the company reeling, financially dev-astated by inventory it could not move. To make matters worse, corporate users were being steadily wooed away from the Palm platform by Research In Motion’s Inter@ ctive Pager ( a two- way pager that enabled users to send messages over the Internet via a wireless data network) and BlackBerry. Though the original BlackBerry lacked many of the functions possessed by the PalmPilot, its primary function— rapid and wireless Internet messaging— proved very addictive. Unlike the pen- based PalmPilot, the BlackBerry used a QWERTY keyboard that was opti-mized for using the thumbs to type. It gained such an enthusiastic following that the device earned the nickname “ Crackberry” ( referring to the addictiveness of sending and receiving messages). The Arrival of Smart Phones By 2002, an industry- wide transition to smart phones was on the horizon. Smart phones integrated PDA functionality in a wireless telephone. Whereas some PDA models had wireless phone capabilities in the form of a clumsy phone module, smart phones emphasized the styling characteristics of a mobile phone, and thus were more comfortable for use as a telecommunications device. However, unlike regular cell phones that have some organizer capabilities, smart phones had larger, sharper screens that could display regular Web pages rather than the small subset of Web pages designed to be readable on cell- phone displays. 7 They also typically enabled users to take pictures and download music or other data. Smart phones had higher margins than PDAs ( at least initially); however, the conver-gence of PDAs and mobile phones also meant that companies that produced PDAs ( such as Palm and Compaq) were now to be pitted against very large and established mobile phone rivals such as Nokia, Motorola, and Samsung. Over the next five years, Palm, Research In Motion, Nokia, Motorola, Samsung, and HTC battled each other for the rapidly growing smart phone market, with each gen-eration packing in more features and memory while simultaneously trying to whittle down the price to capture the consumer market. By 2006, analysts were estimating that just over 13 million smart phones had been shipped in 2005, while PDA sales had virtually ground to a halt. Nearly all of the smart phones relied on tiny keyboards akin to those on the origi-nal BlackBerry, suggesting that the pen- based interface was on its way out. A game-changing event occurred in June 2007, however, when Apple made a splashy entrance to the mobile phone market with its iPhone. The iPhone had a sleek form factor, and an elegant and intuitive interface that relied on a touch screen. The device also capitalized on the enormous success of the iPod by being able to down-load and play both music and videos. The iPhone was considered a huge commercial and critical success, selling more than 1 million units in its first 74 days. 8 The iPhone was also locked into an exclusive arrangement with AT& T, so other carriers scram-bled to find touch screen– based phones with which to compete against the iPhone. The growing sophistication of smart phones dramatically increased the role of software and applications, heating up the battle to control the dominant operating system for smart phones. By 2008, the three biggest proprietary operating systems were Apple’s iPhone, Research In Motion’s BlackBerry, and Microsoft’s Windows Mobile. Handset makers could also, however, choose from three open- source platforms: Android ( a Linux- based platform developed by Google), LiMo (“ Linux Mobile,” backed by a consortium of 50 handset makers), and Symbian ( which had previously been a proprietary consortium- backed platform, but was bought out by Nokia in 2008 and transferred to open- source). 9 The only clear winner was the consumer— so long as the industry did not consolidate around a single platform, all of the companies would compete through vigorous innovation, bringing more to users for less. By the end of 2007, sales of smart phones had reached $ 39 bil-lion and were expected to grow to $ 95 billion in 2013, thus making up nearly half of the mobile phone market by value ( and 34 percent by number of units). 10

Five Question on page 92

Discussion Questions

Why did most of the early PDA companies fail, even if they had innovative and sophisticated product designs?

Could early PDA companies have done anything differently to survive?

Why was Palm successful where so many others had failed?

Was being late to the smart phone market a disadvantage for Apple? What factors enabled Apple to successfully enter when it did?

5. Are there increasing returns in the smart phone market? Is it likely to eventually pick a single operating system as the dominant design?