It has been observed over the decades that the mobile industry oscillates from a vertically integrated structure to a horizontal structure and back. The vertical structure is characterized by proprietary technologies and components that are tightly integrated. These create greater barriers to entry resulting often in an oligopolistic market structure. The industry of the ‘80s belonged to this category. Mobile handset makers such as Motorola and Nokia, and network equipment makers such as Ericsson, Lucent, and Nortel held their forte during this period. A number of patents relating to network standards and radio interfaces were filed during this time to protect their innovations and raise the barriers to entry.

The shift

On the other hand, the horizontal structure is characterized by modular components and standardized interfaces. With low barriers to entry, the number of players in the industry often increases and competition becomes intense. The shift from vertical to horizontal structure is often typically preceded by a move towards standardization. Most of the patent holders in the eighties filed for “essential patents” in different standards developed by various telecom bodies so that they could earn license revenue from those who worked on related technologies and applications. The essential patents from firms such as Ericsson, Motorola, and Nortel that got incorporated in to the 2G/3G standards paved the way subsequently towards the horizontal structure. Standardization of Subscriber Identification Module (SIM) and radio interfaces in handsets occurred in late ‘90s. Subsequently, in early 2000, the industry started moving from vertical to horizontal structure. With standardized interfaces, mobile handset manufacturing was outsourced to Original Design Manufacturers in Taiwan and China such as HTC. Mobile operators started outsourcing IT operations of the networks including billing and operational support system to third party vendors such as Cognizant, IBM, TCS and Wipro. Those which did not see the shift suffered. Examples include Nortel that filed for bankruptcy in 2009, Lucent which filed for bankruptcy protection in 2009 and Motorola that sold its wireless network business in 2010.

The setting up of Open Handset Alliance and release of Android open source operating system for mobile devices accelerated the shift towards horizontal industry structure. Android grew in popularity and in adoption by handset vendors such as Samsung and the application developer community alike, thanks to its modularity and open interfaces, netting activations of almost one million per day! Thanks to the standardization effect of 3G Partnership Project (3GPP), the network equipment industry saw the emergence of Huawei as a strong contender to the market dominated by Ericsson and Nokia Siemens.

Going back?

When things seemed to have settled in the horizontal way, Apple single-handedly stuck to its vertical integration of everything from chip to applications, guarding its inventions, filing for more and more patents, and creating a niche market of marquee customers for its supreme user experience based iPhones and iPads. The verdict in favour of Apple on the Apple vs. Samsung case on patent infringements by Samsung by the California jury last week may well be a turning point for the mobile handset industry that may realign itself from horizontal to a vertical structure. The making of the Surface tablet by Microsoft Windows – the first venture by Microsoft in the hardware space; purchasing of Motorola Mobility by Google last year possibly in a bid to make its own mobile phone; related attempts by Facebook – the social networking firm to venture in to making a Facebook friendly device; acquisition of Ericssons’ stake by Sony to build devices that integrate content, games and applications in Sony’s eco system; and the sudden emergence of interest in Silicon Valley in real silicon, point to this direction. The International Herald Tribune carried an article recently titled “Silicon Valley’s latest darling: Hardware”. Apple seems to have taught a generation of product designers that software is not of much use unless it is ported and integrated on to specially designed hardware to provide out-of-the-world user experience. Samsung almost did it much like Apple; however seems to have hit a roadblock and was not able to protect itself fully due the non-proprietary nature of the software.

What does it hold for the future? The above clears the path for Microsoft to make another sincere attempt to position Windows 8 as a serious mobile platform. We have seen Gmail user base jump from about 140 million to more than 400 million after the launch of Android, indicative of more and more users accessing Gmail from mobiles and tablets. Similar trends are likely with the outlook.com service launched by Microsoft as well.

It is likely that most of the makers of Android handsets and tablets including Samsung will “dual home” now on to Windows, hedging their risk against Apple’s patent assaults. Google, on the other hand, armed with powerful patents that it procured from Motorola Mobility relating to Long Term Evolution (LTE) technologies is likely to launch soon its own Android handset, much like its recently announced Nexus 7 tablet, thus reducing its dependence on other handset makers and changing its monetization model from pure advertisement to tangible hardware and software.

These weeks will see lunch of many such phones: newer Lumia phones from Nokia running Windows 8; another Android phone from Google’s Motorola Mobility, just before the expected lunch of Apple’s iPhone5 on Sep 12th. For all you know, it may well be good for the consumers who get to experience truly integrated “non-Apple” mobiles and tablets with awesome features!

(The authors work in Sasken Communication Technologies. Their views are personal.)

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