Have you been “WAP”ped yet?  Before you reach through the screen to slap me, let me ask another question.  Have you upgraded to a computer with a 1 GHz plus Pentium processor?  My guess is the answer to both questions is, “No.”   In this issue, inter-fas explores the market ecologies created by Microsoft/Intel for PC’s and Nokia/Motorola/Telcos for mobile Internet.  We conclude that it may not be the currently touted popular wisdom that an economic downturn is creating doldrums in the high tech industry.  Rather, high-tech market leaders are drawing us into a recession with strategies that do not take a holistic approach. 

DANCING OUT OF STEP WITH YOUR PARTNER:   The Risks of Business Co-Evolution

 In his groundbreaking bestseller in the mid-1990’s, James Moore introduced the concept of market ecologies; the idea that the environment within which a business operates can be likened to an ecosystem.  There are not only competitors out there but also a host of other entities that support, feed off of or run parallel to a company.   Where on the “food chain” does a company fit?  Is it a leader of its ecosystem, in which case an entire cascade of businesses are beholden to it and live or die according to its health.  Or is it a smaller player, constantly looking for cues from the leader, opportunities to profit from changes within the community but not readily capable of transplanting itself into another industry ecosystem.  In the interests of the whole ecosystem’s hygiene, competitors sometimes shelve their narrow interests to work together in specific ways or areas, a phenomenon, which has come to be known as “co-optition”.   Moore’s concept serves as a holistic framework sense making of complex, integrated markets.

 Moore also expanded on the idea of co-evolution; that under certain circumstances “interdependent species evolve in an endless reciprocal cycle”[1].   He detailed the wonderful and incredibly profitable symbiotic relationship established between Intel and Microsoft as leaders of their ecosystem.  Basically, these two companies took their understanding of Gordon Moore’s Law (that the speed/capacity of microprocessors will double every 18 months) and answered the question:  Why will people need a faster computer in 18 months to use the same old software?  The answer:  They won’t need it to run the same old software, they will need it to run new, ever-more exciting, useful and need we say bloated software packages.  Whether by design or merely by hearing the call of the music and stepping up to dance with their partner, these two companies have maintained a rhythm that has shaped the last fifteen years growth of a vibrant computer industry.  

Of course, the pirouette of growth we see above was not just attended by chips and operating systems.  Microsoft introduced applications that were huge money-spinners to match the improvements demonstrated in 3.1, Windows 95 and Windows 98.  And the PC community, Compaq, IBM, Dell, Gateway, HP and myriad others, fed off of Intel’s chip improvements.  Hundreds of other companies like Creative Technologies, Canon, JPL, US Robotics, fed off the need for improved peripherals.  Though much of the growth of the industry came from new users, undoubtedly a large percentage of sales also came from upgrades. Individuals and businesses retired “obsolescent” machines after two years to get the latest and fastest.

In his book, Moore also pointed out that such co-evolving leaders must endeavor to maintain their importance to the entire ecosystem through innovation, criticality and embeddedness.[2]  Criticality is ensuring your company’s contribution to the business ecosystem is valued both by customers and other members.  When the entire ecosystem is tied to your products, processes and organizational contribution, you are said to be embedded.  

 The Fall of 2000 saw a Fall of 2000.  PC sales dropped.  The stock market dropped.  Economists warn of an economic slowdown, the possibility of a recession and cite decreased consumer spending with concerns about the economy as a factor.[3]  Dell, Gateway and Intel made profit warnings and the NASDAQ has plummeted (not only due to those announcements, but they were symptomatic).

inter-fas believes the problem we see now is not solely that consumers are worried and therefore refraining from buying.  They lack a compelling reason to do so.  One of the partner’s in this waltz of the high tech ecosystem has fallen out of step; has not responded to the evolutionary leap initiated by its partner in the system.  The Windows 2000 launch did not offer compelling reasons to upgrade from Windows ’98 to the new operating system.  The Office 2000 suite runs well with Win ’98.  An update to the Office suite is due early in 2001, but industry analysts do not see a tremendous need for it.[4]  In the meantime, Intel continued to improve Pentium III and prepare the launch, including priming consumer expectations for Pentium 4.  The machines incorporating these fastest chips are sitting in inventory or getting discounted.  Basically, consumers are asking, “Why do I need 1.4 GHz processing speed when my 660 MgHz machine runs the existing software I like just fine?”  At the same time Microsoft networking products have come under attack by alternatives with creative business propositions, most notably Linux, and the consumer franchise was weakened by renewed vigor from Apple with innovative products in the iMac line increasing their Macintosh sales 32% in 2000.[5]

Intel, on the other hand, seems to have seen this coming as early as Fall 1997, with various investments into new areas of the convergence economy.  They have even launched consumer products such as the MP3 player to compete with others who pioneered this sector.  But chip sales to PC manufacturers remain its # 1 source of revenue, and this source took a dive in the last quarter of 2000 with a bleak picture painted for the first half of 2001.  It intends to advance the launch and commoditization of Pentium 4 so that its sales surpass those of Pentium III before the end of 2001.[6]  We believe this is counter indicated.

Microsoft, in a move that is shortsighted from a market ecologies perspective, recently launched the X Machine, a dedicated gaming device.  If it is successful, it will dull a significant incentive consumers might have to upgrade to faster computers; graphics intensive gaming.  That will indirectly cut the legs out of Microsoft’s efforts to sell new OS and applications software.

To save this situation, to help pull Intel out of the dilemma presented, to maintain its criticality to the ecosystem, indeed to contribute to a restoration of the United States economy (forget the Fed, we need Bill!) Microsoft must restore an image in the consumer’s mind that it is innovative.  It should dedicate all efforts to the new Office launch this spring so that the product is extremely exciting and presents a very compelling case to business and home consumers.  Failing this, the ecosystem may continue to evolve in ways out of Intel and Microsoft’s control.[7]  These two highly successful partners will have lost embeddedness.  An alternative scenario, equally destructive to the co-evolution they have enjoyed, would be that Intel comes up with a “Penguin Pentium” embracing Linux and tailoring a chip to provide super fast speed for that platform or another software house, Lotus perhaps, launches a brilliantly fast, stripped down but sexy office applications suite that makes mid-speed machines perform with Formula One response.

 The Future of Mobile Communications

Besides doldrums in the PC ecosystem, the mobile telecommunications equipment companies hit the stock market with earnings warnings in the end of 2000.  For Motorola, personal communications represent 35% of its $10.1 billion dollar sales.  At the end of year 2000, profitability and sales were plummeting.[8]  Texas Instruments, chip maker to the mobile phone industry, warned in October its sales were slowing and in January warned of a 10% drop in revenue for the first quarter.  In both cases, a slowdown in sales to the mobile phone market was cited. Ericsson has given up the ghost entirely, announcing it was exiting the mobile handset business on January 26 after a worse than expected fourth quarter loss of $155 million.[9]  Both Nokia and Motorola cite a worsening economy as the source of their mobile phone sales woes.[10]  But, as in the PC market, are declines in consumer spending due to economic fears?  Or is it another case of co-evolution gone off-track and out of step with the consumer?

The mobile phone ecosystem, and its attempts to merge into another ecosystem, the Internet, represents an interesting case.  To start off with, the ecosystem is much more complex than the PC ecosystem.  While one standard clearly dominates the operating system used in PC’s globally, Microsoft’s MS-DOS and Windows, in mobile messaging and telephony there are a number of competing standards.  This is largely due to the insular nature of national and regional telephone monopolies that in the past insulated markets from competition and allowed the evolution of discrete standards.  The US, Japan and Europe developed their own standards.  In the PC industry, one large anchor client (IBM) was sufficient to set a global PC boom in motion for Intel and Microsoft.  In mobile telephony, there are many anchor clients to be persuaded, not to mention consumers to be convinced.  As we can see from the adoption of standards, it is not even enough if a single standard is chosen for the mighty US market, it is still insufficient momentum to get the world to settle on one.   Efforts to establish a global standard in time for the implementation of 3G[11] have been fractionated by strong regional players wanting to push their strengths.[12]  To make it more complex, there are also different standards both for the software design (such as WAP, Wireless Application Protocol) and the hardware operation (such as CDMA2000, Code Division Multiple Access). 

Right now we are being promised wonderful new devices.  Multi-purpose electronic tools that can act as PDA’s, pagers, mobile phones, digital cameras, digital checkbooks, wireless computer broadband modems, video conferencing systems, web surfing portals, dinner date and restaurant locators, emergency search and rescue beacons and a plethora of other functions.  Nokia, for example, has been heavily advertising features of 3G phones saying, “Your video camera is not a mobile phone, but soon your mobile phone will be a camera.”  Soon?  Another company promised us that mobile internet was “an everyday thing”.  This is just a tease.  Unless you are Japanese, you will not enjoy these products this year or even in 2002.  We are talking about 2003 before 3G is implemented in all major markets.  Neither the devices nor the networks on which to run them are installed right now. 

inter-fas sees several major problems choking up the current market: