15.912 TECHNOLOGY STRATEGY SPRING SEMESTER 2005 FINAL PAPER SHOULD MOTOROLA EMBRACE 100% THE LINUX OPERATING SYSTEM (OS) FOR SMARTPHONES? Silvia Battigelli Alberto Farronato Carlos Mazariegos 15.912 - Technology Strategy Final Paper 1. Introduction In a period when the market for mobile devices is changing and moving towards convergence of multiple products into one single device, it is time for the big players in all related industries to reconsider their strategy to capture more of the value that convergence will create. Motorola, the second largest manufacturer of mobile handsets, recently adopted a new open source OS in a completely new market, such as the one of smartphones in China, and the question is: should they strongly adopt the new standard in all of the new products and in all of the markets? We believe that the answer is yes, and in this paper we will explain why. 2. An Overview of Motorola Motorola was originally founded as the Galvin Manufacturing Corporation in 1928 by Paul V. Galvin and his brother Joseph E. Galvin in Chicago, Illinois. Galvin Manufacturing Corporation's first product was a battery eliminator, a device that allows battery-powered radios to run on standard household electric current. In the 1930’s the company introduced one of the first commercially successful car radios and a single-frequency mobile radio receiver for police broadcasts. The company had just entered into the new field of mobile radio communications with net annual sales of $287,256. In the 1940’s, after Galvin Manufacturing Corporation becomes Motorola and offers first public stock, and into the 1950’s Motorola kept growing with new technological and commercial innovations in radio devices, television and personal pagers. By that time Motorola’s net sales were $177.10 million and the company had become one of the world’s largest manufacturers of semiconductors. In the 1960’s the company expanded internationally to more than 14 countries in Europe, Asia, and Latin America and ventured into semiconductors for the automobile industry. In the 1970’s, Motorola demonstrates a design for the DynaTAC (Dynamic Adaptive Total Area Coverage) the first commercial portable radio telephone, which used the cellular radio technology. In the next decade Motorola’s revenues grew from: $796.42 million up to $3.10 billion. Entering the two decades from 1980 to 2000, Motorola experienced explosive growth. Electronic components for the automotive industry become the first major market for Motorola microprocessors. Motorola introduces the first true 32-bit microprocessor. It contains 200,000 transistors on a three- eighths-inch square chip. Motorola's first DynaTAC cellular system begins commercial operation. It had, over 15 years, devoted $100 million to the development of cellular technology. The world's first commercial handheld cellular phone, the Motorola DynaTAC phone, became available to consumers in 1984. Growth was also fueled further by the introduction of the Bravo numeric pager, which became the world's best-selling pager. Later, in the 1990’s, the company introduced the world's first two-way pager, S. Battigelli, A. Farronato, C. Mazariegos 2/25 15.912 - Technology Strategy Final Paper which allowed users to receive text messages and e-mail and reply with standard responses. Sales had reached the mark of $10 billion, when Motorola launched the 3.1 ounce StarTAC®, which at the time, was the world's smallest and lightest cellular phone, and developed the world’s commercial digital radio system that integrates paging, data communications, voice dispatch and wireless telephone in a single radio network and a single handset. After the stock market bubble burst in 2000, Motorola had several years of losses, downsizing and restructuring charges. Motorola and General Instrument Corporation had merged their businesses to provide integrated video, voice and data networking for cable, Internet and high-speed data services. Despite the slowdown in growth and company losses, Motorola managed to keep innovating in the telecommunications industry by focusing on handset manufacturing. In 2001, it introduced its first metal mobile phone, the Motorola v60 phone, with anodized aluminum housings, Internet access, text messaging capabilities and voice-activated dialing. A year later, it became available in all three cellular technologies — GSM, TDMA and CDMA — and quickly became a worldwide best seller. In 2002, Motorola launched its first 3G nationwide voice and date network using Code Division Multiple Access 1X (CDMA 1X) technology with KDDI, Japan's second largest wireless operator, enabling Internet access at speeds more than double that of existing networks. At this point, the company had developed its first single-chip Global Positioning System (GPS) receiver solution. This breakthrough technology enabled designers to add accurate location-sensing features to portable consumer electronics products. Motorola launched in 2003, the A760 phone, which was the world's first handset combining a Linux operating system and Java technology with full PDA functionality. Motorola had just begun fighting a new battle in the new smartphone arena. 3. The Smartphones Market In the last two years we have been seeing the integration of between mobile phones and PDAs in a single multipurpose device, the smartphone (see Figure 1). A smartphone is a mobile phone with “smart” capabilities or, in other words, a voice-centric device that includes basic data functionalities like address book, calendar, notepads, and more advanced ones, like e-mail, web browsing, etc. Latest devices include also entertainment features such as digital music players and digital cameras. S. Battigelli, A. Farronato, C. Mazariegos 3/25 15.912 - Technology Strategy Final Paper The trends of increasing complexity of device features can be clearly seen in the s curves of figure 1. The first smartphone was launched in 1996 by Nokia (the Nokia 9000), but the year when he market began really taking off was 2004. In this year many new models were launched and the number of new model announcement made it clear that the market was booming. In 2004 the market almost doubled every quarter (from 70% to 80% increase every quarter) reaching 10.7 million units shipped in Q1 2005 (Exhibit 1c). Considering that the mobile phone market counts up to 500 million units sold per year, and the fact that in the future it’s very likely that most of the people, who currently own a standard mobile device, will migrate to a smartphone, some estimate that forecasts for the global smartphone market will exceed 50 million units by the end of 2005, and account for about 25% of the mobile devices marketed by 2008 (Exhibit 5). Given the origin of the device and its evolution, we support the thesis of convergence of different players into the same market. We can list, therefore, as competitors, mobile phones manufacturers like Nokia, Sony Ericsson, Fujitsu, and Motorola, as well as PDA manufacturers like RIM (Blackberry producers) and PalmOne (Please refer to Exhibit 1a, 1b and 1c for sales and the relative market shares). Nokia’s excellent performance (66.7% market share with leadership position in EMEA - Europe, the Middle East, Africa - Asia/Pacific and Latin America) is primarily due to the success of its new high- end products (6630, 6670), besides its highly recognized brand name in the market as a leader mobile phone producer (Exhibit 3 and 4). In fact, most of the smartphone consumers, buy a smartphone only after having owned a basic mobile phone first, therefore it’s not surprising that the world wide mobile phone leader has soon become the number one supplier of smartphones. Nokia will further expand its product portfolio in 2005 with more “phone like” smartphones (already announced the new model 3230 and the new product family 668x, see Exhibit 2a). Motorola gained the second position in Smartphone shipments in the fourth quarter of 2004 (10.2% market share) due in large part to its already existing leadership position in the U.S. and the success of S. Battigelli, A. Farronato, C. Mazariegos 4/25 15.912 - Technology Strategy Final Paper its Microsoft-based (the old MP200 and the new MP220) and Symbian-based smartphones (the new A1000) in the EMEA region (Exhibit 2b). Besides, the company had been able of taking advantage of the increased demand for Linux products in China and expanded its product portfolio with two new models (A780 and E680 smartphones). We will cover the smartphone’s Operative Systems (OS) in the next section. It is interesting to note that, Motorola has currently in its product range smartphones based on three different OS: Microsoft, Symbian and Linux. Recent news stated that Motorola discontinued the MP200 models based on Microsoft. Therefore, that leaves it currently with two different OS. Fujitsu, Sony Ericsson and PalmOne are following the leader together with other minor manufacturers. None of them got over 5% market shares in the fourth quarter of 2004 and there are several reasons for this. Fujitsu is currently selling only in Japan, and at the moment, there are no plans of expanding sales outside its home country. Sony Ericsson is focusing more on expanding its consumer mobile phone portfolio than on developing its P9xx smartphone series (Exhibit 2d). Finally, PalmOne hasn’t been fast enough to market its new product (Treo 650 launched in the fourth quarter of 2004 - Exhibit 2c). Basically, in one way or another, all these players were not able to capture value from the opportunities that the new market, that was just being created, brought with it. 4. OS in Smartphones Operative Systems are fundamental components of smartphones. The OS is the lower layer of software that controls and manages all the basic circuits of the smart-phone. It is the platform upon which all applications work. The fundamental task of the OS for smartphones is the same, as that of an OS for a desktop or laptop.