Operating System, Technology and Community as Sales Drivers within the Smartphone Industry

Abstract

This study aims at highlighting the main sales drivers within the smartphone industry.

Indeed it could help to understand why, despite countless companies produce every year thousands of different smartphone models, only few of them emerged and increased rapidly both market shares and profits (Apple, Google-Android and Samsung).

The research demonstrates that the choice of the right combination of (1) Operating System and (2) device technologies is essential to compete in the industry. In particular, according to customers, the most important element in a smartphone is the OS. Also, due to the presence of relevant network effects, only few OS can coexist in the industry, to the point that today smartphone sales are almost entirely concentrated around iOS (Apple OS) and Android. All previously existing OS (Symbian, BlackBerry OS, Windows Mobile) lost rapidly market shares, whereas many others failed to emerge (Palm/HP webOS, Windows Phone).

Moreover, the paper demonstrates how the community (including apps, blogs, ROMs developers and brand communities) actually influences smartphone sales. Indeed, the apps represent one of the main drivers for smartphone adoption and, secondly, specialized websites/blogs and friends’ suggestions are the main information sources when it comes to buy a new smartphone.

Abstract (Italiano) Questa ricerca si propone di evidenziare quali sono i principali driver di vendita nel mercato degli Smartphone, al fine di comprendere perchè solo pochissime aziende (Apple, Google-Android e Samsung) siano riuscite finora ad emergere e trarre profitti in un’industria che vede coinvolti numerosissimi attori.

Il presente lavoro ha evidenziato quanto essenziale sia la scelta di una corretta combinazione di Sistema Operativo e tecnologia del dispositivo, al fine di garantire un adeguato livello di vendite.

In particolare, il Sistema Operativo è, secondo l’opinione degli utenti, l’elemento più importante in uno smartphone. Inoltre, data la presenza di rilevanti effetti di rete, nel mercato c’è posto solo per pochissimi Sistemi Operativi, tant’è che al momento il mercato è decisamente dominato dai dispositivi Apple (che utilizzano iOS) e da alcuni smartphone Android. Tutti gli altri Sistemi hanno perso rapidamente quote di mercato (Symbian, BlackBerry OS, Windows Mobile), oppure non sono neppure riusciti ad emergere (Palm/HP webOS, Windows Phone).

In aggiunta, i risultati della ricerca hanno evidenziato quanto la community che circonda il mercato degli smartphone sia in grado di condizionare le vendite dei dispositivi stessi.

Il termine community include blog, app, sviluppatori di ROM alternative o brand communities. In effetti, la disponibilità di app è al momento una delle principali motivazioni che inducono all’acquisto di uno smartphone, mentre blog e suggerimenti di amici rappresentano la principale fonte di informazione prima dell’acquisto di un nuovo dispositivo.

TABLE OF CONTENTS

INTRODUCTION _______________________________________________________________________ 1 CHAPTER 1. LITERATURE REVIEW _________________________________________________________ 3 1.1 NETWORK EXTERNALITIES, COMPATIBILITY, PATH DEPENDENCY ____________________________________ 3 1.1.1 Product compatibility _________________________________________________________ 9 1.1.2 Path dependency ____________________________________________________________ 11 1.2 FIRST-MOVER ADVANTAGES (AND DISADVANTAGES) ___________________________________________ 14 1.2.1 First mover advantages _______________________________________________________ 14 1.2.2 First mover disadvantages ____________________________________________________ 19 1.3 COMPETITION VS. INNOVATION_________________________________________________________ 22 CHAPTER 2. THE SMARTPHONE INDUSTRY TODAY __________________________________________ 27 2.1 THE OPERATING SYSTEM _____________________________________________________________ 31 2.1.1 Apple iOS __________________________________________________________________ 33 2.1.2 Android ___________________________________________________________________ 35 2.1.3 Windows Phone _____________________________________________________________ 40 2.1.4 Symbian OS ________________________________________________________________ 43 2.1.5 BlackBerry OS_______________________________________________________________ 44 2.1.6 Palm/HP webOS _____________________________________________________________ 44 2.2 DEVICES’ PRODUCERS AND TECHNOLOGIES _________________________________________________ 46 2.2.1 Devices’ producers - Samsung __________________________________________________ 49 2.2.2 Devices’ producers – Apple ____________________________________________________ 50 2.2.3 Devices’ producers – Nokia ____________________________________________________ 52 2.2.4 Devices’ producers – RIM _____________________________________________________ 53 2.2.5 Devices’ producers – HTC _____________________________________________________ 54 2.2.6 Devices’ producers – Others ___________________________________________________ 54 2.2.7 Devices’ technologies - LTE ____________________________________________________ 55 2.2.8 Devices’ technologies – NFC ___________________________________________________ 56 2.3 COMMUNITY _____________________________________________________________________ 57 2.3.1 Apps and Apps Stores ________________________________________________________ 58 2.3.2 Blogs and reviews ___________________________________________________________ 63 2.3.3 Independent software developers_______________________________________________ 64 2.3.4 Brand communities __________________________________________________________ 66 CHAPTER 3. SALES DRIVERS IN SMARTPHONE INDUSTRY ____________________________________ 69

3.1 PURPOSE _______________________________________________________________________ 69 3.2 RELEVANT STORIES IN SMARTPHONE INDUSTRY ______________________________________________ 70 3.2.1The integrated approach, the iPhone winning strategy (for now)______________________ 70 3.2.2 Samsung Galaxy S3__________________________________________________________ 73 3.2.3Palm/HP webOS history ______________________________________________________ 75 3.3 BLOGS ACTIVITY IN ITALY _____________________________________________________________ 78 CHAPTER 4. SURVEY OF CUSTOMER PREFERENCES _________________________________________ 85 4.1 METHOD _______________________________________________________________________ 85 4.1.1 Data collection _____________________________________________________________ 85 4.1.2 Sampling __________________________________________________________________ 86 4.1.3 Limitations ________________________________________________________________ 87 4.2 RESPONDENTS’ DEMOGRAPHIC DATA ____________________________________________________ 87 4.3 SURVEY RESULTS __________________________________________________________________ 89 4.4 FINDINGS ______________________________________________________________________ 101 CHAPTER 5. CASE STUDY: LG ELECTRONICS – MOBILE COMMUNICATIONS_____________________ 103 5.1 LG HISTORY ____________________________________________________________________ 103 5.2 THE GROUP STRUCTURE ____________________________________________________________ 105 5.3 ECONOMIC AND FINANCIAL SITUATION __________________________________________________ 107 5.4 LG MOBILE POSITION IN WORLD AND ITALIAN MARKET _______________________________________ 110 5.5 LG MOBILE (ITALY) STRATEGY ________________________________________________________ 112 5.6 ANDROID ADOPTION PROCESS IN LG MOBILE (ITALY)_________________________________________ 114 5.6.1 Advantages in using Android _________________________________________________ 115 5.6.2 Disadvantages in using Android _______________________________________________ 117 CONCLUSION _______________________________________________________________________ 119 REFERENCES _______________________________________________________________________ 120 WEBSITES CONSULTED ________________________________________________________________ 134 APPENDIX _________________________________________________________________________ 135

Figures

FIGURE 1 - TYPICAL THEORETICAL MODEL FOR NETWORK GOODS ................................................................ 4 FIGURE 2 - STRATEGIES IN PRESENCE OF NETWORK EFFECT .......................................................................... 6 FIGURE 3 - OPTIMAL PRODUCT STRATEGY ACCORDING TO MARGINAL COST AND NETWORK EFFECTS ........ 7 FIGURE 4 - ENDOGENOUS GENERATION OF FIRST-MOVER ADVANTAGES ..................................................... 14 FIGURE 5 - FIRST-MOVER ADVANTAGE: A CONCEPTUAL FRAMEWORK ...................................................... 19 FIGURE 6 - SCATTER PLOT OF INNOVATION ON COMPETITION .................................................................... 24 FIGURE 7 - INNOVATION AND COMPETITION, THE NECK-AND-NECK SPLIT .................................................. 24 FIGURE 8 - FITTED LOG R&D RATIO AGAINST PROFIT ELASTICITY ............................................................. 25 FIGURE 9 - MOBILE PHONES REVENUES IN 2012 (TOTAL: $250 BILLIONS) .................................................. 29 FIGURE 10 - SMARTPHONE SALES AND TOTAL MOBILE DEVICES SALES (MILLIONS OF UNITS) ..................... 30 FIGURE 11 - INSTALLED BASE OF MOBILE HANDSETS AT 3RD QUARTER 2012 ............................................. 30 FIGURE 12- SMARTPHONE SALES GROWTH 2005 - 2012 BY PLATFORM (MILLIONS UNITS) .......................... 32 FIGURE 13 - OS SALES MARKET SHARE (UNITS, % OF SMARTPHONE MARKET) ........................................... 32 FIGURE 14 - COUNTRIES WITH GREATEST NUMBER OF ACTIVE IOS AND ANDROID DEVICES (MILLIONS) .... 33 FIGURE 15 - CURRENT INSTALLED BASE DISTRIBUTION, SEPTEMBER 2012 ................................................. 36 FIGURE 16 - HISTORICAL DISTRIBUTION FROM APRIL TO OCTOBER 2012 ................................................... 37 FIGURE 17 - FASTEST GROWING IOS AND ANDROID MARKETS BY ACTIVE DEVICES.................................... 40 FIGURE 18 - MAIN MOBILE PLATFORMS' TIMELINE FROM 2000 TO 2010...................................................... 41 FIGURE 19 - MAIN MOBILE PLATFORMS' TIMELINE FROM 2005 TO 2012...................................................... 42 FIGURE 20 - SMARTPHONE SALES (MILLION UNITS) BY BRAND ................................................................... 47 FIGURE 21 - SMARTPHONES MARKET SHARES BY BRAND ............................................................................ 47 FIGURE 22 - SMARTPHONES INSTALLED BASE: BUSINESS AND CONSUMER (MILLION UNITS) ...................... 48 FIGURE 23 - ENTERPRISE SMARTPHONE MARKET SHARES ........................................................................... 48 FIGURE 24 - IPHONE UNITS’ SALES BY QUARTER (THOUSANDS) .................................................................. 51 FIGURE 25 - NOKIA STRATEGY 2011: HANDSET REVENUES MIX OVER TIME................................................ 52 FIGURE 26 - NOKIA, APPLE AND SAMSUNG SMARTPHONE SALES BY QUARTER (MILLION UNITS) ............... 53 FIGURE 27 - FORECASTS MOBILE APPS STORE REVENUES 2008-2014 (USD MILLIONS) ............................... 58 FIGURE 28 - TOP APP CATEGORIES. ............................................................................................................. 59 FIGURE 29 - APPLE IPHONE APP STORE METRICS ........................................................................................ 60 FIGURE 30 - REASONS TO BUY A SMARTPHONE (% OF RESPONDENTS) ........................................................ 61 FIGURE 31 - SHARES OF RESPONDENTS WHO USE THE FOLLOWING APPS DAILY .......................................... 61 FIGURE 32 - MOBILE APPS REACH BY AGE .................................................................................................. 62 FIGURE 33 - APPLE'S ESTIMATED GROSS MARGINS (GM) BY PRODUCT ...................................................... 70 FIGURE 34 - APPLE VS. NON-APPLE REVENUES GLOBALLY ......................................................................... 71 FIGURE 35 – PROFIT SHARE OF MOBILE COMPUTING INDUSTRY .................................................................. 71 FIGURE 36 - AVERAGE AND MAXIMUM TUTTOANDROID.NET VISITORS ON THE WEBSITE ............................ 81 FIGURE 37 - TUTTOANDROID.NET VISITORS AGE DISTRIBUTION .................................................................. 81

FIGURE 38 - TUTTOANDROID.NET VISITORS GENDER DISTRIBUTION ............................................................81 FIGURE 39 - PERCENTAGE OF RESPONDENTS OWNING A SMARTPHONE ........................................................87 FIGURE 40 - GENDER DISTRIBUTION OF SURVEY RESPONDENTS OWNING A SMARTPHONE ...........................88 FIGURE 41 - AGE DISTRIBUTION OF SURVEY RESPONDENTS OWNING A SMARTPHONE .................................88 FIGURE 42 - NATIONALITY DISTRIBUTION OF SURVEY RESPONDENTS OWNING A SMARTPHONE ..................89 FIGURE 43 – NUMBER OF RESPONDENTS OWNING THE MOST COMMON SMARTPHONES ...............................91 FIGURE 44 - DISTRIBUTION OF PRICE PAID BY RESPONDENTS ......................................................................91 FIGURE 45 - DISTRIBUTION OF PRICE PAID BY RESPONDENTS (APPLE IOS OWNERS)....................................92 FIGURE 46 - DISTRIBUTION OF PRICE PAID BY RESPONDENTS (ANDROID OWNERS)......................................92 FIGURE 47 - SMARTPHONES' MOST IMPORTANT ELEMENTS ACCORDING TO SMARTPHONE OWNERS.............93 FIGURE 48 - SMARTPHONES' MOST IMPORTANT ELEMENTS ACCORDING TO APPLE IPHONE OWNERS ...........94 FIGURE 49 - SMARTPHONES' MOST IMPORTANT ELEMENTS ACCORDING TO ANDROID OWNERS ...................94 FIGURE 50 – LG ELECTRONICS MANAGEMENT PHILOSOPHY, CONDUCT AND VISION ...............................105 FIGURE 51 – ITALIAN MOBILE COMMUNICATION BUSINESS UNIT POSITION...............................................106 FIGURE 52 - LG MOBILE COMMUNICATIONS (GLOBAL) SALES ..................................................................108 FIGURE 53 - LG MOBILE COMMUNICATIONS (GLOBAL) OPERATING MARGIN (%) .....................................108 FIGURE 54 - LG ELECTRONICS ITALIA S.P.A. (ALL BUSINESS UNITS) REVENUES (EUR) ............................109 FIGURE 55 - LG ELECTRONICS ITALIA S.P.A. (ALL BUSINESS UNITS) EBITDA AND PROFIT (LOSS) (EUR)109 FIGURE 56 - LG ELECTRONICS ITALIA S.P.A. (ALL BUSINESS UNITS) EMPLOYEES' NUMBER ......................110

Tables

TABLE 1 - ESTIMATED AVERAGE MARKET SHARE AND PROFITABILITY ....................................................... 17 TABLE 2 - INSTALLED BASE OF SMARTPHONE OPERATING SYSTEMS IN USE, 2012 ..................................... 32 TABLE 3 - WORLDWIDE SMARTPHONE OPERATING SYSTEM....................................................................... 42 TABLE 4 - SMARTPHONES PRICE PYRAMID .................................................................................................. 46 TABLE 5 - IPHONES VERSION AND PRESENTATION DATE ............................................................................. 50 TABLE 6 - MOBILE APP STORE DOWNLOADS WORLDWIDE 2010 - 2016 (MILLIONS OF DOWNLOADS) .......... 59 TABLE 7 - TOP 10 POWERFUL INFLUENCERS IN MOBILE .............................................................................. 63 TABLE 8 - NUMBER OF FOLLOWERS/LIKES OF THE MAIN ITALIAN MOBILE BLOGS ....................................... 64 TABLE 9 - NUMBER OF VISUALIZATIONS OF SOME YOUTUBE VIDEO-REVIEWS (THOUSANDS) ..................... 64 TABLE 10 - UNIQUE MONTHLY VISITORS; VISITORS’ AGE AND GENDER....................................................... 79 TABLE 11 - INTERESTS AND SITES ALSO VISITED BY VISITORS OF THE TOP ITALIAN MOBILE BLOGS ............ 79 TABLE 12 - TUTTOANDROID.NET AUDIENCE INTERESTS .............................................................................. 82 TABLE 13 - SITES ALSO VISITED BY TUTTOANDROID.NET VISITORS ............................................................ 83 TABLE 14 - OS DISTRIBUTION OF SMARTPHONES OWNED BY RESPONDENTS ............................................... 89 TABLE 15 - BRAND DISTRIBUTION OF SMARTPHONES OWNED BY RESPONDENTS......................................... 90 TABLE 16 - SMARTPHONES' FEATURES RANKINGS ACCORDING TO ALL SMARTPHONES, IOS AND ANDROID OWNERS............................................................................................................................................. 95

TABLE 17 - OS' CHARACTERISTICS RANKINGS ACCORDING TO SMARTPHONES’ OWNERS ............................ 95 TABLE 18 - BRANDS' CHARACTERISTICS RANKINGS ACCORDING TO SMARTPHONES’ OWNERS .................... 96 TABLE 19 - EVALUATION OF DIFFERENT INFORMATION SOURCES WHEN BUYING A SMARTPHONE .............. 97 TABLE 20 - PERCENTAGE OF JAILBROKEN OR ROOTED SMARTPHONES ........................................................ 98 TABLE 21 - PERCENTAGE OF RESPONDENTS SATISFIED WITH THEIR SMARTPHONE ...................................... 98 TABLE 22 - PERCENTAGE OF RESPONDENTS THAT WOULD BUY AGAIN FROM THE SAME PRODUCER............ 98 TABLE 23 - BEST OS ACCORDING TO SMARTPHONES' OWNERS ................................................................... 99 TABLE 24 - BEST DEVICE ACCORDING TO SMARTPHONE OWNERS ............................................................... 99 TABLE 25 - COMPANIES IN LG GROUP DIVIDED BY SECTOR OF ACTIVITY ................................................. 106 TABLE 26 - TOP FIVE WORLDWIDE TOTAL MOBILE PHONE VENDORS, SHIPMENTS, AND MARKET SHARE, Q1 2012 .......................................................................................................................................... 110 TABLE 27 - TOP FIVE WORLDWIDE SMARTPHONE VENDORS, SHIPMENTS, AND MARKET SHARE, Q1 2012 ........................................................................................................................................................ 111 TABLE 28 - TOP TEN SMARTPHONE VENDORS WORLDWIDE. SHIPMENTS AND MARKET SHARE, Q2 AND Q1 2012 ................................................................................................................................................ 111 TABLE 29 – TOP 8 SMARTPHONE VENDORS’ MARKET SHARE IN ITALY AND WORLDWIDE (Q1 2012) ....... 112 TABLE 30 - LG ANDROID SMARTPHONES RELEASED IN ITALY AND PRICES AT LAUNCH ............................ 115 TABLE 31 - CUSTOMERS BUYING INTENTIONS ABOUT LG NEXUS 4 (1181 VOTES IN TOTAL) .................... 118

Introduction This research aims at providing evidences about the drivers of Smartphones’ sales success. Currently, the industry is crowded by thousands of different players, each pursuing its own objectives. From this multitude, only few companies emerged, whereas countless more are almost ignored by customers.

The main idea behind this study comes from an article by Curwen (2010), which was very helpful to create a logical order of the most important elements composing this very complex industry. Curwen’s article “Is your smartphone smarter than mine?” highlighted “three key elements in the struggle for supremacy in the smartphone field: Operating System, device and apps” (Curwen, 2010).

This research will go a step further, including some more elements not considered by Curwen, and it will be concentrated on: 1. Operating System; 2. device technology; 3. community.

This third (new) element includes apps (as in Curwen), but also blogs, independent software developers and brand communities.

The paper is divided into five chapters.

In the first one, the previous researches about some smartphone-connected topics will be reviewed. In particular, the chapter will present the main ideas about network externalities, first-mover advantage (and disadvantage), and about the relation between competition and innovation.

In the second chapter, a quick description of the smartphone industry today will be provided. The three main elements OS, device and community will be described one by one in order to provide a deeper understanding of the current situation in the industry.

After that, the chapters 3, 4 and 5 will illustrate all the main findings of this study, ranging from some relevant stories within the smartphone industry (chapter 3) to a survey of customer preferences (chapter 4), to conclude with a case study dealing with the Mobile Communications business unit of the Korean company LG Electronics.

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CHAPTER 1. Literature Review 1.1 Network Externalities, compatibility, path dependency

When talking about network externalities, also known as network effects, researchers refer to the benefit a user derives from the consumption of a good related to how many other people own similar or compatible goods (Katz and Shapiro, 1985).

A widely used example in literature is the telephone. Imagine you are the only person owning a telephone. In this case it would be totally useless because you would not have anybody to talk with. Imagine now, instead, the contrary case in which everybody owns a telephone compatible with yours. Of course you would have the possibility to talk with every single person you would need to contact and the benefit you derive from this good is much bigger than in the other case. This is a positive network externality, which means that the benefit a person derives from using a telephone is bigger when lots of other people own a compatible telephone.

Network externalities demonstrated to be dramatically important in the development of new technologies. For instance, Golsbee and Klenow (2002) found out that these spillovers are extremely important for household computer adoption. People are more incline to buy their first computer when a high fraction of people living around them owns and use a computer.

Earliest analysis about network externalities have been realized by Katz and Shapiro (1985, 1986a, 1986b), Farrell and Soloner (1985, 1986), David (1985).

Gallaugher and Wang (2002) provided a great support to the network externalities theory dividing the benefit derived from a good into two parts, as in Figure 1. The term a denotes the “stand-alone benefit� provided to the customer when he is the only one using that product. The term b(N) represents instead the value derived from a network of size N. It is a function of the dimension of the network N.

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Figure 1 - Typical theoretical model for network goods

Source: Gallaugher and Wang (2002)

When, as usual, b(N) has a positive value, it represents a “positive consumption externality� generated, according to Katz and Shapiro (1985), by one of the following effects:

1. Direct effect, when the number of consumers directly affects the quality of the product. The telephone is the best suitable example, as well as the Telex, Whatsapp or Viber (smartphones’ apps), Skype, Facebook.

2. Indirect effect, as happens for instance with the Operating Systems. The benefit a user derives from using one OS instead of another indirectly depends on the total number of people using that System. The number of users in fact affects the availability of software, hardware components, training courses, etc. That is the main reason why in Operating System markets there is always a great competition in the very first years of the product development. To the contrary, when the market is more mature, only few market-leaders own the great majority of the market shares.

Concerning the indirect effect, it has been proved that network externalities can even cause changes in product attributes. For instance, it has been found a positive interaction between CD title availability and some CD player attributes like changer capacity and oversampling rate. Additionally, a wider availability of CD titles generates a significant positive impact on the overall price of CD players (Basu, Mazumdar and Raj, 2003).

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3. Effects on post-purchase service, as in automobile market: the quality of the post-purchase service depends on the number of customers, since it affects the value and the size of the service network. This element could also result in negative effects for a brand trying to expand its business in new markets.

Customers initially could be reluctant to buy from that brand when, in the initial phases, the service network is not big enough. Furthermore, an initially small network could reduce the users’ willingness to pay for that model.

This negative effect of the network externalities, according to literature, is caused by an excess inertia (Farrell and Saloner, 1985). The innovations initially diffuse very slowly due to hesitations associated with the potential utility of the product when few adopters exist. Prospective customers “may adopt a wait-and-see attitude, delaying adoption until uncertainties are reduced” (Srinivasan, Lilien and Rangaswamy, 2004).

Sometimes customers just expect other customers would not switch to the new technology (Katz and Shapiro, 1992).

Furthermore, the excess inertia could take place even if customers are sure about the future success of an innovation, but they do not want to bear the temporary loss of network benefits the adoption of the new technology could cause them (Farrell and Saloner, 1985; Janssen and Mendys-Kamphorst, 2007).

Also, often researches’ results indicate that “in a static market, consumers rather than firms, benefit from increasing network externalities, with competitive effects outweighing the surplus-extraction abilities of firms” (Viswanathan, 2005).

Therefore, the presence of network externalities strongly affects businesses’ strategies.

According to Sun, Xie and Cao (2004), there are four alternative product strategies for innovating firms operating in markets with network effects. These strategies, according to the authors, explain why companies behave very differently one from the other (for instance Palm and Microsoft, in PDA industry, adopted both free and paid licensing policies). These strategies are:

1. Single-Product-Monopoly Strategy, when the innovator is the only one selling all the products based on that particular technological standard; 5

2. Technology-Licensing Strategy, through which the innovator concedes licences to competitors in order to let them create compatible product externally;

3. Product-Line-Extension Strategy, when the innovator creates internally compatible product using the same technology, but with different quality and therefore different prices;

4. Combination Strategy, when a combination of the previous strategies is created.

The authors during their researches investigated (1) under what conditions a strategy should be preferred to another and (2) what is the net impact of a licensing fee on the profitability of a licensing strategy (Sun, Xie and Cao, 2004). They came to the conclusion shown in Figure 2 and 3, where Îł represents the strength of network effects and c2, c3 are functions of cost, quality and network effects parameter.

Figure 2 - Strategies in presence of network effect

Source: Sun, Xie and Cao (2004)

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Figure 3 - Optimal product strategy according to Marginal Cost and Network Effects

Source: Sun, Xie and Cao (2004)

The figures show that in presence of a small internal cloning cost, it is always preferable to develop internally compatible products (line extension). To the contrary, when these costs are particularly relevant, it is more convenient to create a single-productmonopoly (in case of weak network externalities) or to concede licenses to competitors (when network externalities are strong).

Once a company decides for licensing, then it has to establish whether to ask for a licensing fee or not. In smartphones industry this debate is very important since Google is providing its Android OS for free, while other competitors are applying licensing fees (Microsoft, Symbian, etc.).

Sun, Xie and Cao (2004) strongly assert that “when the quality of the clone product is sufficiently high and the cost of the clone product is sufficiently low, a paid-licensing strategy is always more profitable than a free-licensing strategy. Otherwise, a freelicensing strategy can be more profitable when the network effect is very high�.

Anyway, in case of a paid-licensing strategy, the licensee would produce a smaller quantity of the clone product and it would sell it at a higher price. Therefore the net impact of a royalty fee is not always easy to be determined. Generally speaking, “strong network effects favor the free-licensing strategy while weak network effects favor the 7

paid-licensing strategy. This is because the installed base generated by the clone maker is more important to the innovator when network effects are strong than when they are weak” (Sun, Xie and Cao, 2004).

Some strategists believe that network externalities could sometimes justify pre-emptive business strategies (like below-marginal-cost pricing or penetration pricing) in order to achieve first-mover advantages (Li, 2005).

Furthermore, as in Gallaugher and Wang (2002) “it is sometimes best for vendors to subsidize adoption in the presence of strong network externalities […]. Giving away product can be considered an extreme form of subsidy aimed at rapidly acquiring market share”. Companies could decide to subsidize other companies in order to adopt their technologies motivated by a desire to control a standard, or in order to encourage the purchase of related products. Cusumano and Yoffie (1998) reported that due to these reasons Microsoft decided to enter the Web server market by providing its commercialgrade product totally free of charge. More recently, Amazon sold its Kindle Fire almost at the cost-price in order to make profits from the sales of correlated services (books, games, etc.).

But, according to Li (2005), companies’ strategies have to consider that network externalities sometimes are not truly relevant and important, and that the continuous pursuit of those positive network externalities could lead companies to complete failures. He stressed that “information transmission problems along distribution channels could boost or sustain erroneous beliefs of network externalities”. The analysis demonstrated that “rational technology vendors have incentives to claim bogus network effects to exploit credulous retailers. It also demonstrates why channel members under information asymmetry may not reach information-efficient equilibria due to information blockages” (Li, 2005).

Furthermore, in industries where network externalities actually exist, pioneers have often less survival chances than in industries without any network effects (Srinivasan, Lilien and Rangaswamy, 2004). As already said, it could be related to the initial uncertainty surrounding new technologies in markets where network effects are important. In addition, very often the pioneers’ development cost could be higher than the initial revenues and, finally, later entrants could immediately benefit from more valuable network externalities almost skipping the start-up phases. Anyway the authors 8

did not totally take into account the protection provided by patents, but nevertheless they declared that this phenomenon is moderated in case of very radical innovations.

Indeed “for more radical products and for technologically intense products, increases in network externalities are associated with increased survival duration” (Srinivasan, Lilien and Rangaswamy, 2004).

An interesting study by Shankar and Bayus (2003) found out that in some industries network effects are not symmetric among competitors. They have been analysing the home video game industry, where at the time there were only two major players (Nintendo and Sega). Specifically, they discovered that “the firm with a smaller customer network (Nintendo) has higher network strength than the firm with the larger customer base (Sega)”. Thus, their results provide a possible explanation for the situation at that time, when the firm with a smaller customer network (Nintendo) was able to overtake the sales of a firm with a larger network size (Sega).

1.1.1 Product compatibility

Strongly connected to the theme of network externalities is the problem of product compatibility. A significant analysis of how these two elements are connected is provided by Katz and Shapiro (1986a): “When network externalities are significant, so too are the benefits to having all consumers purchase units of the durable that can utilize identical units of the complementary good. If two units of hardware can utilize identical units of software, they are said to be compatible. All television sets, for example, are compatible in that they can receive and process the same broadcasts. Understanding the extent to which products will be compatible with one another is central to the analysis of markets in which network externalities arise”.

The compatibility issue is a quite relevant one nowadays in smartphones industry, since Google created a widely compatible Operating System (Android), which strongly stimulated competition among smartphones’ producers.

In general, we could affirm that from the customers’ point of view standardization and compatibility are desirable, due to (1) wider positive network externalities (when 9

existing), (2) cheaper prices due to more intense competition and (3) a thicker secondhand market (Farrell and Soloner, 1985). On the other side, standardization and compatibility could lead to social costs related to (1) a reduction in variety and, even more important, (2) to the possibility that the industry, stuck with the common standard adopted, could be reluctant in adopting in future new more efficient standards (Farrell and Saloner, 1985; David, 1985).

From the producers’ point of view, the effects of compatibility are even more under discussion. According to Farrell and Saloner (1985) a wider compatibility guarantees to companies the possibility to acquire at lower prices the inputs for their products, due to the utilization of the economies of scale by the producing companies. However, when standardization and compatibility strongly exist in a market, it is almost impossible for new innovative companies to introduce new more efficient standard. When indeed the old standard possesses a huge installed base (a huge number of people using that standard), it is really difficult to introduce a new one, even if it is clearly superior to existing one (Katz and Shapiro, 1992).

This topic is going to be discussed more in detail in the next pages. For the moment, it is enough to understand that compatibility and standardization have totally different consequences depending on the preconditions in the market.

For instance Economides (1989) asserts that even in absence of network externalities, a regime of compatibility is preferred, since it results in higher prices and profits for competing companies. Even further, he asserts that “in a two-stage duopoly game, where the degree of compatibility is chosen in the first stage, and prices are chosen in the second stage, the perfect equilibrium is at full compatibility, that is, at zero-adapter's cost (provided that the demand for hybrids and single-producer goods are of the same size)” (Economides, 1989).

Also Kristiansen (1998) agrees on the fact that in case of standardization and compatibility the companies’ profit is increased, and therefore this solution would be the desirable one. On the other hand he underlined that the presence of network externalities could induce companies to introduce new incompatible technologies earlier, instead of coordinating in the introduction of a common compatible technology.

This anticipation is harmful to the companies because it causes an increase in R&D 10

costs, but anyway every company pushes to introduce its incompatible technology as soon as possible aiming at capturing an installed base advantage toward competitors. To summarize, network externalities may induce firms to enter in a market before it is socially optimal. Without network externalities, instead, “the firms will choose the socially optimal R&D strategy and introduce a new technology late” (Kristiansen, 1998).

A similar idea has Choi (1994), who analyses this issue from the users’ point of view and asserts that early potential users usually adopt an irreversible technology too early compared to the social optimum. This means that early buyers could decide to adopt incompatible technologies, which could successively turn out to be socially inferior.

Choi (1994) wrote:

“The importance of the technology choice becomes more acute in the presence of network externalities. In this case, the danger of a user choosing the wrong technology is not only that she will have a technologically inferior one ex post, but also that she will face the possibility of being stranded by other people who adopt a different and incompatible technology”.

But the technology choice is even more important for companies, since for them is extremely costly to switch in future from one technology to another.

1.1.2 Path dependency

Countless researches have been realized on the importance of the first steps in the development of a new technology and on the technology adoption. This topic is known in literature as “path dependency”, underlining how important is the “path” in order to guarantee the future success of an innovation.

Early studies in the area have been realized by Arthur (1989), who wrote: “When two or more increasing-return technologies compete then, for a market of potential adopters, insignificant events may by chance give one of them an initial advantage in adoptions. This technology may then improve more than the others, so it may appeal to a wider proportion of potential adopters. It may therefore become further adopted and further improved.

Thus a technology that by chance gains an early lead in adoption may eventually corner the market of potential adopters, with the other technologies becoming locked out”.

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The main idea by Arthur is that even not technology-related events could seriously affect the future success of an innovation. Opposite technologies could compete for years in order to gain market shares, but then random events could determine whether a technology is going to dominate the market in future of not.

This phenomenon leads to an extremely high competition in the initial phases, where companies try to exploit as much as possible the positive network effect in order to become the dominant technology and to defeat all competitors.

One of the funniest and most interesting stories related to the topic is the history of the QWERTY keyboard adoption (David, 1985). Even if the DSK layout (Dvorak Simplified Keyboard, patented in 1932) has been recognised to be superior, allowing to type from 20% to 40% faster, nowadays we still use QWERTY layout due to random past events (and business strategies). Even the US Navy conducted a study to verify whether it would have been convenient to switch to DSK. Results demonstrated that “the increased efficiency obtained with DSK would amortize the cost of retraining a group of typists within the first ten days of their subsequent full-time employment” (David, 1985).

Despite this, three features made the QWERTY layout the locked-in dominant technology, and all of them are related to network externalities:

1. technology interrelatedness, that is the need for compatibility between hardware (the keyboard) and the “software” (the typists’ memory toward a particular keyboard layout);

2. economies of scale, leading to a standardization de facto toward a single common layout allowing to reduce costs both for typewriters producers and for typist;

3. quasi-irreversibility of investments, since it was a lot easier for producer to switch to QWERTY layout than for QWERTY-trained typist to switch to other keyboards.

12

And the very recent development of new technologies is full of similar stories. In late 70s for instance two companies, Sony and Matsushita, were competing in introducing a home video system (VCR market). Sony managed to introduce the Betamax system in February 1976 while one year later Matsushita introduced the VHS, which was incompatible with the Betamax system (Park, 2004).

During the first years there was quite and intense competition between the two producer, with Matsushita leading the market mainly due to the possibility to record up to four hours of video (Sony’s Betamax was initially stuck to two hours), since lots of TV shows in US last more than two hours.

Anyway, Sony’s managed to expand its registration time limit up to five hours, and Matsushita immediately reached six hours with its VHS. Due to the fierce competition, prices were rapidly falling down, up to the point that the price of the average VCR dropped from $2.165 to $600 between 1976 and 1983 (Klopfenstein, 1985).

The second phase started in 1981, when, even if there was not a superior technology (both standards reached and adequate recording time), the VHS sales grew dramatically, and consequently more and more VHS producer entered in the market, while more and more Betamax producer exited. The complete de facto standardization was reached in 1988 when even Sony decided to abandon Betamax and started producing VHS VCR systems (Park, 2004).

Anyway, it is important to notice that not in all markets there is a single standard.

Several technologies could survive and compete for years, as in home computers for instance, where Apple and Microsoft are still both leading the market.

Indeed, not being locked-out is not the same as being locked-in (Shilling, 2002). In addition, even companies locked-out sometimes succeed in re-entering into the market with a new technology conform to the dominant design.

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1.2 First-mover advantages (and disadvantages)

1.2.1 First mover advantages

A number of researches are trying to figure out whether being pioneer in a market provides positive or negative effects in terms of market shares and profit. In other words, researchers still want to discover whether first-mover advantages actually exist in real business environment.

They define first-mover advantages as “the ability of pioneering firms to earn positive economic profits� (Lieberman and Montgomery, 1988). Essential precondition for the creation of such advantages is the existence of a situation of environmental change and asymmetry among companies. As in Figure 4, the first mover opportunity is generated by some peculiarity of the company (a specific competence, an innovation, a patent, etc.) or could be caused simply by good luck. Then, some specific mechanisms intervene and create a first-mover advantage (or disadvantage).

Figure 4 - Endogenous generation of first-mover advantages

Source: Lieberman and Montgomery (1988)

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As in Lieberman and Montgomery (1988), first mover advantages arise from three main sources: technological leadership, pre-emption of assets and buyer switching costs.

Each of them will be now analysed more in detail.

1. Technological leadership. It is caused by the experience or learning curve, according to which the production costs decrease as the cumulative output increases. The first mover has therefore the advantage of starting earlier than competitors the costs reduction. Alternatively, the technology leadership is the result of R&D activities. The company owns an innovation, or a patent, through which has a competitive advantage toward competitors.

In addition, very often innovation are linked one to the other. It means that an innovation is the starting point to create further innovations, and many companies could be forced to stop their R&D activities in order to do not violate other companies’ patents.

2. Pre-emption of scarce assets. The first mover firm could be able to exploit its advantages by anticipating competitors in the acquisition of scarce resources.

Such assets could refer to specialized employees, best geographical locations, raw materials, etc.

3. Buyers switching costs, incentivizing customers to do not switch from the firstmover firm to later entrants. These switching costs force later entrants to invest extra resource in order to attract new customers. Sometimes these later entrants could even subsidize the adoption of their technology in order to make profits in the long term.

Lee, Smith et al. (2000) performed researches about first-mover advantages in new products introduction and found out that faster and earlier moving firms actually obtain bigger profits. Anyway, they also underlined that “the competitive imitation impacts the durability of first-mover advantages�.

Despite product imitation is cheaper than product innovation (Mansfield, Schwartz and Wagner, 1981), according to Robinson, Kalyanaram and Urban (1994) market pioneers 15

can develop first-mover advantages lasting for decades. They assert that, even if in the initial phases market pioneers could face difficulties in making profits from their innovations, in the longer term their profits will be higher than later entrants’ ones. It means that the initial risks and higher costs are more than compensated during the years.

The main of these long-lasting advantages is the “broad product line and brand proliferation” (Robinson, Kalyanaram and Urban, 1994).

Song, Di Benedetto and Zhao (1999) investigated the differences in first-mover advantages between manufacturing and service firms analysing data from nine countries/regions: United States, United Kingdom, Germany, Japan, China, Taiwan, Hong Kong, South Korea and Singapore. They discovered that:

“(1) managers from all countries perceive pioneering to be associated with higher market share and/or profitability; (2) manufacturing firm managers perceive pioneering risks to be significantly more important than do service firm managers; (3) cost and differentiation advantages of pioneering are, for the most part, more significant to manufacturing than to service firm managers; (4) Western manufacturing firm managers perceive the cost advantages to be more important than Asian Pacific manufacturing firm managers”

Results show that, according to managers’ opinion, first-mover advantages (and risks) are slightly greater in manufacturing firms than in service ones.

Jakopin and Klein (2012) analysed data from 191 mobile network operators from 49 different countries and discovered that first-mover and incumbent companies in mobile communication services industry obtain higher market shares and better financial results compared to later entrants. Anyway these advantages provide greater first-mover/laterentrants discrepancies related to market shares, and smaller discrepancies when talking about operating margin. This happens because later entrants compensate part of their market share disadvantages with different strategies like “SIM-only tariffs, outsourcing and alternative distribution approaches” (Jakopin and Klein, 2012).

The presence of first-mover advantages in mobile telecommunications industry (European) has been subject of study also for Gomez and Maicas (2011), who obtained similar results. In particular they concentrated their attention on the positive contribution of switching costs, as supposed by Lieberman and Montgomery (1988).

Their study (Gomez and Maicas, 2011) revealed that order of entry and switching costs have a positive and significant impact on market shares. Furthermore, pioneers have 16

higher profits than second entrant; these have higher profits than third ones and so on.

Table 1 shows results obtained by the authors, related to European mobile telecommunications industry1.

Table 1 - Estimated average market share and profitability

Source: Gomez and Maicas (2011)

It is interesting to notice that a previous study by Fernandez and Usero (2007) analysed the same European mobile telecommunications industry using data from 1993 to 2005.

They seem to totally confirm what already shown, that is the existence of an order of entry advantage, especially when the first-mover has prior experience in the industry and when pioneers are two instead of one. But – they also stated – the advantages diminish over the time and the number portability has a negative effect of pioneers’ advantages.

Similar results obtained Makadok (1998) while studying the persistence of first-mover advantages in market with low entry barriers. He found out that first or early movers enjoy a highly sustainable pricing advantage, but a moderately sustainable market share advantage.

Mascarenhas (1992), studied first-mover effect in oil-drilling industry, suggesting that pioneers benefit from inter-markets effects, which are definitely bigger than intramarket ones. It means that early-movers have great survival changes in foreign markets, due to the good reputation developed in the home market.

Carow, Heron and Saxton (2004) demonstrated the existence of early-mover advantages also in acquisitions of companies in industries where the acquirer has already operations.

1

They used data from 19 European countries from 1998 to 2007

17

All these studies were supporting first-move as source of competitive advantage for companies, but not all researches obtained the same results, since some of them revealed that first-mover advantages do not exist in all countries and in all industries.

A study by Kerin, Varadarajan and Peterson (1992) underlined that “that first-mover status may or may not produce sustainable advantages because of a multiplicity of controllable and uncontrollable forces” (they included in their work a very interesting table showing the findings of all the main empirical studies about the topic available at that time2).

They also presented a very effective scheme (Figure 5) showing both first-mover and later-entrants advantages, summarized in an “overall magnitude of first-mover advantage”.

2

Journal of Marketing Vol. 56 (October 1992), p.36

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Figure 5 - First-mover Advantage: A Conceptual Framework

Source: Kerin, Varadarajan and Peterson (1992), p.39

Henkel (2002) coined the expression “the 1.5th mover advantage� in order to show that in some particular cases is not realistic to talk about a full commitment by the first mover, since there is often the possibility to react (partially) to the strategy of the later entrants. It means that the pioneer commits only partially and occupies a role somehow between the pioneer and the later entrants, source of a 1.5th mover advantage.

1.2.2 First mover disadvantages 19

Being the first mover is also source of disadvantages which, according to Lieberman and Montgomery (1988), can be summarized in:

1. Free-rider effects, referring to a series of positive externalities obtained by later entrants such as infrastructure development, buyers’ education, information spillovers in R&D, employees’ training, etc.

2. Resolution of technological or market uncertainty, which allows later entrants to operate in a less risky and already consolidated market. Later entrants have more precise data about the potential profits in the market and can decide more consciously what strategy to adopt.

3. Shifts in technology or customer needs, since later entrants could adopt new more performing technologies able to partially replace the first-movers’ ones.

Moreover, these new technologies could adapt better to new customers’ needs.

4. Incumbent inertia, since the first-movers could be a lot less flexible due to fixed assets, organizational structure, and existing product.

Boulding and Christen (2003) support the idea of the existence of bigger first-mover disadvantages than advantages. They stated:

“Contrary to common expectations, our results show that, on average, firstto-market leads to a long-term profit disadvantage relative to later entrants.

We replicate, in an economic framework, the well-established consumerbased long-term demand advantage, and show that first-to-market leads to an even larger long-term average cost disadvantage. These results hold for a sample of business units selling consumer goods as well as for a sample of business units selling industrial goods. […] Pioneering leads to an initial profit advantage that erodes over time. The advantage lasts for about 12 to 14 years.

Anyway, the authors confirmed partially the results of traditional literature admitting that (1) a strong market share position, (2) limited customer learning and (3) patent protection are source of important and long-lasting first-mover advantage.

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Lee, Smith et al. (2000) confirmed that the product imitation in competitive environments leads to a dramatic reduction of first-mover advantages. “All advantages erode. As competitors copy an advantage, it is no longer an advantage. It is a cost of doing business. For example, automatic teller machines do not provide a competitive advantage to banks because almost all banks offer them. Now banks need to have them to stay competitive and they need to find new sources of competitive advantage” (D’Aveni, 1994; as in Lee, Smith et al., 2000).

In conclusion, seems useful to show results from Shankar, Carpenter and Krishnamurthi (1998), who strongly believe that innovative late-movers can easily outsell early-movers or non-innovative late-movers. It happens because “late mover can beat a pioneer at the pioneer’s own game”, since late entrants can easily look for a successful business, and the defeat pioneers with lower prices and more intense distribution advertising. This strategy is possible because an innovative late-mover can often innovate and improve the product/service provided by the pioneers.

This is exactly what the Germany-based company Rocket Internet is doing nowadays.

They are almost only cloning existing potentially successful internet companies, improving where needed. Therefore, the secret of long-lasting success seems to be, once more, innovation.

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1.3 Competition vs. Innovation

In literature there is quite an important debate to establish whether competition has a positive or negative effect on incentives to innovate.

Historically, there have been two main ideas, conflicting one with the other, by Schumpeter and Arrow.

Schumpeter (1942) supported the existence of a negative linear relation between competition and innovation, since it is rationally impossible for a firm operating in a market of perfect competition to spend resources in R&D activities. According to Schumpeter, the innovation is greatest in monopoly due to the abundance of profits a company could (in part) spend for further innovation and to maintain its competitive advantage3.

On the other side, Arrow (1962) affirmed that innovation expenditure and results are bigger in regime of competition, where competitors innovate in order to reduce their cost and obtain a competitive advantage. Monopolists, instead, have really low incentive to innovate, since they already occupy a privileged position in the market.

With further innovation, the monopolist would just replace itself as leader in the market, without significant profit increase (Tirole, 1988). As in Arrow (1962), “the monopolist’s incentive is always less than the cost reduction on the post-invention monopoly output, which in this case is, in turn, less than the competitive output (both before and after invention). Since the inventor’s incentive under competition is the cost reduction on the competitive output, it will again always exceed the monopolist's incentive”.

A first tentative to connect those two theories has been realized by Scherer (1967), who recognised that “the relationship between industrial inventive and innovative effort and concentration is a complex one, since high concentration and rich technological opportunity tend to coincide”. Indeed, he found evidence of a (modest) positive correlation between the employment of scientists and engineers and concentration, confirming, as stated by Schumpeter, that an excessive competition does not stimulate innovation.

3

Schumpeter recognized anyway the effect of the threat of future competition as incentive to innovation.

He stated that “the business-man feels himself to be in a competitive situation even if he is alone in his field” (Schumpeter, 1942, pp.85).

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Despite this, he also stated that in industries with high concentration (when the fourfirm ratio exceeds 55 per cent) “the group discipline may even be sufficiently strong to permit a live and let live attitude toward technological innovation” (Scherer, 1967), which means than an excessive concentration does not stimulate innovation either.

Some years later, also Kamien and Schwartz (1976) confirmed the existence of a nonlinear relation between competition and innovation, since they demonstrated that an intermediate level of rivalry (competition) was the perfect condition for the highest possible rent of the innovators.

Actually, Scherer (1967) Kamien and Schwartz (1976) only anticipated what Aghion et al. (2005) formalized later as the inverted-U relationship. These authors found evidence (using data from UK firms) that the relation between competition and innovation takes the shape of an inverted U (Figure 6). It means that when initially the market power is high (low competition), the innovation increases with competition (as suggested by Arrow). To the contrary, when market is in a situation of higher competition, innovation decreases with competition (Schumpeter-effect).

The authors measured innovation using the average number of patents obtained by firms in an industry (other works in literature used other methods such as R&D expenditure, number of specialized employees, etc.) and weighted each patent by the number of times it has been cited by other patents. Competition, instead, has been measured using the Learner Index4.

They also found out that, as in Figure 7, “more neck-and-neck5 industries show a higher level of innovation activity for any level of product market competition. Second, the inverted-U curve is steeper for the more neck-and-neck industries”. This means that in industries with a greater technological equivalence among companies, the level of innovation is higher, whatever the level of competition is.

4

A firm’s Lerner index ranges from 0 to 1, where 0 indicates absence of market power, and 1 indicates a situation of complete market power. It is calculated as (P – MC) / P, where P is the Price and MC the Marginal Cost 5 The expression “neck-and-neck” refers to a situation in which the firms in an industry have the same (or very similar) technological development level. The contrary case is a situation in which there is and unlevelled sector, where a leading firms is technologically more developed than the laggard firms

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Figure 6 - Scatter plot of Innovation on Competition

Source: Aghion et al. (2005), p.706. Competition is measured according to the Lerner Index; innovation is measured through the number of patents, weighted with the number of citations in other patents.

Figure 7 - Innovation and Competition, the neck-and-neck split

Source: Aghion et al. (2005), p.720. Competition is measured according to the Lerner Index; innovation is measured through the number of patents, weighted with the number of citations in other patents.

Hashmi (2011) revisited partially the inverted-U relation by Aghion et al. (2005). He analysed US firms’ data and discovered that the relationship between competition and innovation is positive, which is in contrast with the findings by Aghion et al. (2005).

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Hashmi (2011) found the reason of this discrepancy in the fact that US manufacturing industries are technologically more neck-and-neck than UK ones. Therefore he indicated that a higher technological uniformity among firms in an industry guarantees a more positive relation between competition and innovation.

Recently, several other studies seemed to support the hypothesis of the existence of an inverted-U relation. A study on Canadian manufacturing industries (Bérubé, Duhamel and Ershov, 2012) confirmed that the intensity of competition positively affect the level of firm expenditure in R&D (Arrow-effect). But nevertheless the authors found out that, especially when there is disparity in the technological level of the firms in the industry (when many firms are technological laggards), a stronger “market power can increase business incentives for innovation” (Bérubé, Duhamel and Ershov, 2012).

Other studies by Peroni and Gomes Ferreira (2012) and Polder and Veldhuizen (2012) completed similar researches using data respectively from industries in Luxembourg and Netherlands. Both studies used Profit Elasticity (PE) as measures of competition, and R&D expenditure as measure of innovation6, and both confirmed the existence of an inverted-U shaped relation between competition and innovation, as in Figure 8.

Figure 8 - Fitted log R&D ratio against Profit Elasticity

Source: Polder and Veldhuizen (2012). The R&D ratio refers to the ratio of R&D to value added.

6

For further information about the variables used, see Peroni and Gomes Ferreira (2012, p.97) and Polder and Veldhuizen (2012, p. 76). The authors used the concept of Profit Elasticity as in Boone (2008).

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Different results come from Planas Raposo de Almeida Costa and Pita Barros (2012), who investigated the effects of a competition policy by the Competition Authority on innovation. They used two different models (one in which the investment in innovation aims at reducing the own costs; a second model in which the investment is anticompetitive, that means it is aiming at increasing competitors’ costs), discovering that in both models a tougher competition policy reduces the optimal level of investment, according to Schumpeter view.

On the other side, a study about mergers effects on innovation by Park and Sonenshine (2012) revealed that post-merger (meaning higher concentration and lower competition) innovation outcomes were smaller than those the merging companies would have had produced without the fusion, as in Arrow’s results.

This is once more the demonstration that “different models with different assumptions predict different relations” (De Bondt and Vandekerckhove, 2012). It is therefore evident that there is not a linear always-valid relation between competition and innovation, and that for the moment most studies confirm the existence of a double effect, reconnecting both Schumpeter and Arrow theories. In very competitive markets there are insufficient resources to create further innovation, and therefore an increasing competition leads to a decreasing innovation. On the other side in industries with high concentration an increasing competition stimulates further innovation, especially when leading firms own a similar level of technologies.

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CHAPTER 2. The Smartphone industry today In this chapter I will describe the situation of the industry today, recollecting as well the main past events. The smartphone industry today is (1) young, (2) growing and changing quickly, (3) quite concentrated, since few leaders detain great part of the market shares and (4) very complex, due to the presence of several different strategies.

The purpose of this work is to provide evidences about the necessity to combine effectively three elements in order to obtain a successful smartphone. As already said in the introduction, these elements are: 1. Operating System (OS), 2. Device Technology, 3. Community.

In the following pages I am going to briefly describe each of them separately, beginning from the Operating System, which I believe is the very essence of a Smartphone.

The reader should take into account that the companies behind those three elements have very different targets one from the others, and every single company creates its strategy in order to maximize its own profit.

In addition, in order to be successful, a company’s strategy has to be compatible with the choices of several other companies. This means that a perfect interaction among OS’ producers, devices’ producers and community is needed.

Very often the strategy of a company affects the future success of several other companies operating in the industry. For instance, Nokia’s decision to switch from Symbian to Windows Phone, had consequences also on the Symbian Foundation, Microsoft, and on the software houses creating software for the Symbian ecosystem.

Also the profit sources are very different from company to company operating in the industry. For instance Google (Android) takes profits mainly from the advertising (included in all Google services for smartphones) and from the Google Play Store sales (from which Google gets a 30% commission).

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However, Android’s direct competitor is BlackBerry OS, aiming just at providing good software to increase the sales of BlackBerry devices. Or there is Apple iOS, targeting at both earning from Apps sales and incentivizing iPhone sales.

Despite this, we could generalize and say that OS’ producers usually aim at selling the services associated to the OS (concept of servitization; Dalli and Lanzara, 2011) and to increase smartphone sales if they are also smartphones’ producers.

On the contrary, devices’ producers gain their profits mostly from the device sales and only partially they managed to create profitable associated services (such as alternative Apps stores, cloud computing services, etc.).

Finally, the element community includes several different kinds of players, who need to be analysed separately.

But first of all we need to define what a smartphone is.

According to the Oxford Dictionary it is “a mobile phone that is able to perform many of the functions of a computer, typically having a relatively large screen and an operating system capable of running general-purpose applications”. Another definition

by Kenney and Pon (2011) states: “in contrast to standard mobile phones, smartphones are powerful computing devices offering traditional wireless voice service as well as native software applications and, perhaps most importantly, the ability to connect to and run a myriad of Internet-based services including email, geolocation, streaming video, and social networking, while providing a good user experience”.

Nevertheless, Ahonen (2012) says:

“The standard definition for a smartphone is that it is a mobile phone which has the type of operating system for which users can install applications. I want to make clear, that this is the standard definition, used by essentially all analysts and major research houses that report on smartphone statistics, etc.

The industry furthermore classifies smartphone operating systems in alphabetical order as Android (by Google), Bada (Samsung, may be merged into Tizen), Blackberry (RIM), iOS (Apple iPhone), LiMo (Linux Mobile Foundation), Maemo (Nokia, was replaced by MeeGo), MeeGo (Nokia and Intel, discontinued by Nokia but used by new handset maker Jolla), Symbian (Nokia, being replaced by Windows Phone), Palm/WebOS (Hewlett-Packard […]), Windows Mobile (Microsoft, being replaced by Windows Phone).

Windows Phone (Microsoft) and Tizen (Samsung and Intel).

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As demonstration of the smartphones’ success, in almost all markets (and in both units and revenues classifications) smartphones’ sales worldwide are gradually overwhelming the Feature Phones’7 ones.

According to Ahonen8’s Phone Book of 2012 (estimates for 2012 are obtained in the summer 2012), the total Mobile Phones industry (Smartphones + Feature Phones) will generate 250 billion dollars of revenues in 2012.

Smartphones’ revenues will account for the 83% of them (Figure 9), which means that the smartphones’ sales in 2012 will generate approximately 210 billion dollars.

However, smartphones’ sales in units will be only the 42% of the total sales of mobile handsets, since in the whole 2012 will be sold 735 million units of Smartphones and 1015 million units of Feature Phones, for a total of 1750 million units of Mobile Phones (Figure 10). The reason of this divergence in percentages is that Smartphones have an extremely higher average price ($289) compared to Feature Phones’ one ($40).

Figure 9 - Mobile Phones revenues in 2012 (total: $250 billions)

Feature Phones

Smartphones $40 billions; 17%

$210 billions; 83%

Source: elaboration, data from Tomi Ahonen, Phone Book 2012 (estimate for 2012)

7

Feature Phones are all non-smartphone Mobile Phones

8

As reported in his well-known blog Communities Dominate Brands, Tomi Ahonen, former Nokia executive “is a bestselling author whose twelve books on mobile have already been referenced in over 100 books by his peers. Rated the most influential expert in mobile by Forbes in December 2011, […] his reference client list includes Axiata, Bank of America, BBC, BNP Paribas, China Mobile, Emap, Ericsson, Google, Hewlett-Packard, HSBC, IBM, Intel, LG, MTS, Nokia, NTT DoCoMo, Ogilvy, Orange, RIM, Sanomamedia, Telenor, TeliaSonera, Three, Tigo, Vodafone, etc. […] Tomi Ahonen lectures at Oxford University's short courses on next generation mobile and digital convergence.” Full biography and books on www.tomiahonen.com

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Figure 10 - Smartphone sales and total mobile devices sales (millions of units) 2,00 1,80

Units sold (billions)

1,60 1,40

41%

30%

1,20 1,00

Smartphones

0,80

Feature Phones

0,60

70%

59%

0,40

Smartphones

0,20 0,00 2011

2012

Source: elaboration, from Ahonen (2012), Phone Book 2012 (estimate for 2012)

Figure 11 - Installed base of mobile handsets at 3rd quarter 2012 (total 5500 million units) Smartphones: 1210 million units, 22%

Feature Phones: 3290 million units, 78% Source: elaboration, from Ahonen (2012), Phone Book 2012

Smartphones’ sales are continuously and significantly growing since more than six years. Undoubtedly, one of the main reasons is the introduction into the market of the Apple’s iPhone (January 2007) and of the Google Android devices (November 2008).

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2.1 The Operating System

The real secret of success of modern smartphones is the Operating System, since it allows operations not even thinkable few years ago.

Despite Palm is often considered the real smartphones’ inventor, Symbian OS, BlackBerry OS and Windows Mobile were the first operating system allowing the user to access to a wide variety of services from their devices. However, those OS were still not adequately supported by big enough apps stores.

The smartphones’ OS industry experienced recently very fast and relevant improvements, cueing the existence of a certain first-mover disadvantage. Indeed, while the first mover (Palm) never managed to create a worldwide sales success, many later entrants had the merit to improve its original idea.

The rapid growth of the smartphones’ market started only in 2007 (Figure 12), when Steve Jobs presented the first Apple’s iPhone, equipped with the first version of the iOS. Figure 13 presents the market shares of the main Smartphones’ OS from 2005 to 2012.

Android, from its launch at the end of 2008, gained very rapidly market shares up to more than 50%. At the moment, only iOS seems to be able to compete with it, since every smartphone equipped with iOS has a much bigger average price than Android ones, generating therefore bigger revenues.

Table 2 illustrates the market shares of the OS’ installed base, which is essential for software developers. A higher market share is a good incentive for them to develop apps compatible with that particular OS. The availability of apps positively affects the likelihood of a further increase of the installed base, creating a positive network externality leading eventually to the leadership of few OS in the market.

At the moment the two leaders are clearly Android and iOS, while BlackBerry OS and Symbian are rapidly losing market shares. Windows Phone (Windows Phone 8 has just been released) represents still a big question mark.

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Figure 12- Smartphone sales growth 2005 - 2012 by platform (millions units)

Source: Ahonen (2012), Phone Book 2012

Figure 13 - OS sales market share (units, % of Smartphone market)

Source: Ahonen (2012), Phone Book 2012

Table 2 - Installed base of Smartphone Operating Systems in use, 2012 (total: 1210 million units) Operating System

Installed base market share

Android

53%

iOS

20%

Symbian

11%

Blackberry RIM

8%

Bada

3%

Windows

2%

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Others

3%

Source: Source: Tomi Ahonen Phone Book 2012

Joining data from Figure 11 and Figure 14, there is evidence that approximately the 14% of the total smartphone installed base is composed by iOS and Android devices in the US, while around the 10% by iOS and Android devices in China.

Figure 14 - Countries with greatest number of active iOS and Android devices (millions)

Source: Farago (2012). Flurry Analytics, active devices during July 2012

In the following pages the main OS are going to be presented, starting from Apple’s iOS. After that, a brief description of Android, Windows Phone, Symbian, BlackBerry OS and Palm/HP webOS will be provided.

2.1.1 Apple iOS

The perfect integration between hardware and software has always been one of the main peculiarities of all Apple products. Therefore, when the company launched the iPhone in the January of 2007, they installed on it a first (still not perfect) version of the iOS, previously called iPhone OS. Today, the same OS is used also (with few differences) on other Apple products (iPad and iPod Touch), enlarging dramatically the customer base and exploiting further on the positive network externalities.

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The iOS is a closed9 operating system and can be installed only on selected Apple products. Every time Apple releases a new version of iOS, a list of what products will be updated is provided. For instance, the latest iOS (iOS 6.0, released on September 2012) is not installable on the first two iPhone versions.

It is not possible to modify or improve the OS (legitimately, at least). Despite this, a huge community of independent developers emerged and succeeds in jailbreaking the iOS from the very first version. The jailbreak allows the user to improve the performances of the devices installing unofficial apps and modifying the original source code of the software. Anyway, Apple never officially approved this operation.

As all other Operating Systems, iOS has both advantages (many) and disadvantages (few). Advantages: •

Easy-to-use interface, which is one of the peculiarities of all Apple products.

The graphic interface of iOS is extremely user-friendly and has improved a lot with the updates: for instance the possibility to group the apps in folders has been introduced with iOS 4.0.

•

Stability: indeed, the general user experience is very fluid, almost always without app crashes, device freezing or similar issues.

•

Security: very rarely virus or malware have been found on iOS. One of the main reasons is that the source code of all the apps in the Apple Store is previously checked and documented as virus-free.

•

Perfect integration with iTunes, through which is possible to regularly backup data or restore them into the device.

•

Great apps availability

•

Continuous innovation: Apple’s vision is to be always leader in innovation and to keep Apple devices “years ahead competitors”10.

•

Easy updates, and for free, immediately after the update release.

On the contrary, the main disadvantages are:

9

iOs source-code is not public. http://www.apple.com/ios/what-is/

10

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•

Locked and secret source code, which actually inhibits a full personalization of the device, especially for expert users who would be able to use the devices at the best. Anyway, the jailbreak is very common among more expert users.

•

Impossibility to install apps not in the official store, that means that a software developer cannot create a personalized app and install it on iOS without paying the Apple Store’s annual fee.

•

Absence of external memories support.

•

Impossibility to transfer files via Bluetooth.

With the last iOS version (iOS 6), launched in September 2012, Apple abandoned the Maps service by Google in order to use its own mapping service. The maps service is a great opportunity for further revenues, due to the possibility to create geo-localized advertising (Rosoff, 2012). However, Apple immediately demonstrated to be not ready at all for this, and their maps revealed themselves a total disaster (Wrenn, 2012).

Apple’s CEO Tim Cook had to openly make an apology for that (Chen, 2012) with a letter on Apple’s website.

2.1.2 Android

Android is a Smartphone and Tablet open-source Linux-based operating system released by the Open Handset Alliance (led by Google) at the end of 2008. The Open Handset Alliance is “a group of 84 technology and mobile companies who have come together to accelerate innovation in mobile and offer consumers a richer, less expensive, and better mobile experience”11. Among these companies there are mobile operators (Vodafone, NTT DoCoMo, T-Mobile, etc.); handset manufacturers (Samsung Electronics, Sony Ericsson, HTC, LG Electronics, etc.); but also semiconductor producers, software houses and commercialization companies.

On October 10th 2012, Google’s CEO Eric Schmidt announced that Google is activating 1.3 million Android devices a day and will reach an installed base of one billion devices in less than one year (Thomas, 2012).

11

http://www.openhandsetalliance.com/index.html

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It took only two years to Android to become the world’s most used mobile platform, mainly due to its open-source nature and to the strong sponsorship the system received by the great majority of the players in the industry, demonstrating how strong are network externalities in smartphones’ OS industry.

The first device equipped with an Android OS was the HTC Dream (also known as TMobile G1) and by now, 10 main versions of the software have been released:

1. Android 1.0 (September 2008); 2. Android 1.1 (February 2009); 3. Android 1.5 Cupcake (April 2009); 4. Android 1.6 Donut (September 2009); 5. Android 2.0/2.1 Éclair (October 2009); 6. Android 2.2 Froyo (May 2010); 7. Android 2.3 Gingerbread (December 2010); 8. Android 3.0/3.1/3.2 Honeycomb (only for Tablet, February 2011); 9. Android 4.0 Ice Cream Sandwich (October 2011); 10. Android 4.1/4.2 Jelly Bean (July 2012).

Figure 15 - Current installed base distribution, September 201212

Source: developer.android.com

Figure 16 demonstrates that the switch from one version to the following one is quite fast. From April to October 2012, Android Ice Cream Sandwich gained the 25% of the

12

The data are calculated using the number of Android devices accessing to Google Play Store in the last two weeks of September 2012.

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market shares. This is caused in part by the updates of the already sold devices (but smartphones’ producers are usually very slow in releasing updates). A lot of customers are indeed incentivized to change smartphone in order to have as soon as possible the latest Android version.

Figure 16 - Historical distribution from April to October 2012

Source: developer.android.com

Someone could question why Google released such a powerful OS totally free of charge, but the theory about network externalities helps us demonstrating that for Google was essential to acquire rapidly very big market shares, and to create huge barriers to the entrance of new OS. The Android development gave Google the possibility for expand to millions more customers the services previously limited to the Computers. Additionally, Google Maps allows to create geo-localized advertising, and through the Play Store (called initially Android Market) Google earns quite a good percentage on the apps sales. Also, Google collects data from Gmail or YouTube in order to send very personalized (and effective) marketing activities. However, Google’s great majority of revenues come still from the traditional searches-related advertising (Fiegerman, 2012) and some data Google had to reveal in its controversy against Oracle show that Google earns more from iOS than from the Android devices.

In the recent years Google tried to expand its activities introducing Google+ (a social network very similar to Facebook), or Google Play Books (an e-book-reading platform very similar to Amazon’s Kindle Store). Besides, the recent name’s change from 37

Android Market to Google Play Store was decided by Google in order to include in its market, in addition to the games and apps, also other products such as movies, e-books or magazines.

From customers or producers point of view, the main advantages provided by Android are: •

Open-source code; allowing every software developer to use or modify the original source-code released by Google. This led to the creation of wide communities of people interested in using and improving the original software.

Furthermore, it allows developers to personalize Android in order to adapt it to different needs. For instance Android can be used also on Tablets, Netbooks, and even on iPhones.

•

Free accessibility, giving the possibility to install Android on very cheap devices, allowing a greater and faster distribution, and therefore a deeper exploitation of the network externalities.

•

Full integration with all Google’s main features, like Gmail, YouTube, Google Search, Google Calendar, Google Maps, Google Voice, Google+, Google Navigator, etc.

•

Great support to apps’ developers, who can easily create and sell their Apps on the Google Play Store.

•

Great apps availability, leading to a great appeal of the smartphones due to the enormous possibility of personalization for both the producer and the end user.

•

Possibility to download apps from unofficial markets, which is not possible on iOS.

•

Full Flash compatibility (up to version 4.0). Apple’s iOS has never been compatible with Adobe Flash Player. Anyway, Adobe decided to stop updating it and therefore also Android will not support Flash contents in the future.

On the other side, Android causes also some disadvantages, such as: •

Low entry barriers for new smartphones’ producers: it is really easy for them to have access to a very powerful and well-known OS, with quite low initial investments.

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•

Necessity for producers to adapt the Android software to each model and to provide updates to customers, because a lot of bugs are daily being discovered (for instance producers have to include the latest Google Security patches in new software).

•

Higher number of virus and malware infections compared to other OS.

From a pure technological point of view, Google Android is very similar to other OS. Only few minor elements are different, such as the possibility to transfer files via Bluetooth (not allowed with iOS) or the possibility to use the smartphone’s internet connection with a wireless-connected Computer (Tethering is not always possible on Windows Phone).

Anyway, some elements allowed Android to defeat other competing OS such as Windows Mobile and Symbian, previous market leaders.

First of all Android received a great support by the biggest Asian Smartphone manufacturers, and their incredibly rapid growth led to the growth of Android. Actually, even Samsung or LG Electronics produced some devices equipped with both Windows Mobile and Symbian, but Android demonstrated to be a step ahead, due to its opensource nature, the existence of great support provided by Google in providing a huge apps’ store and due to some technological features such as the multi-touch and multitasking activation.

In conclusion, despite some defects, Android at the moment seems to be definitely superior to almost all other mobile OS. Only iOS is able to compete quite well with it, but the two OS are not always targeting the same market segment. Android has a huge advantage in lower segments, where Apple is still not operating (and very likely will never operate). Therefore emerging markets are an enormous opportunity for a further diffusion of the Android OS, whereas Apple’s iOS has an equally great opportunity in the higher market segments in the same emerging markets.

As shown in Figure 17, activations of Android and iOS device in China grew by 401% last year, while in a series of other countries, mainly in Latin America and Southern Asia, Flurry Analytics registered a growth between the 279% and the 171%.

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Figure 17 - Fastest growing iOS and Android markets by active devices

Source: Flurry Analytics, July 2011 – July 2012, countries with at least 500k active devices as of July 2011

2.1.3 Windows Phone

Windows’ experience in mobile OS is much bigger than all the other competitors’ one, since they released their first OS for mobile handsets in the second half of the 90s, when earliest smartphones/PDAs were appearing on the market.

In November 1996 Microsoft released Windows CE 1.0, which was the OS of few Handheld PCs such as the NEC MobilePro 200 and the Casio A-10. After that, several other software versions have been released in few years, when there was still very little competition in the market, also due to Microsoft absolute leadership in PCs’ OS and its very strong brand.

After further development, Microsoft launched the Pocket PC 2000 in 2000, while at the end of 2001 was the turn of Pocket PC 2002.

When the interest in smartphones’ was increasing Microsoft changed the name of its mobile platform to Windows Mobile. Soon the competition in the market got tougher, the rhythm of new releases increased and in few years Windows Mobile earned quite a good market share.

However, after iOS and Android introduction, Windows’ mobile platforms have been totally overwhelmed due to a dramatic superiority in term of user-friendliness, apps availability and hardware compatibility. After all, even Microsoft CEO admitted that Windows Mobile 6.5 was originally not in the company plans, since they would have 40

preferred to launch earlier a better performing OS (Hamblen, 2009). Anyway, the gap with iOS and Android was still too big, even when one year later the company finally managed to release Windows Phone 7, followed at the end of 2011 by Windows Phone 7.5 (Figure 19).

Figure 18 - Main mobile platforms' timeline from 2000 to 2010

Source: Dilger (2012)

Today, despite very big marketing investments and the partnership with Nokia (Lumia series), Windows Phone accounts only for the 2% of the smartphones’ installed base (Ahonen, 2012).

Therefore, someone could question why I decided to present the Windows case despite such a low market share. The point is that Microsoft just presented Windows Phone 8, which will be installed on Nokia Lumia 820 and 920, but also on other producers’ devices such as Samsung Ativ series or HTC 8X and 8S.

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Figure 19 - Main mobile platforms' timeline from 2005 to 2012

Source: Dilger (2012)

Furthermore predictions by ICD predict that Windows Phones (erroneously called Windows Phone 7 / Windows Mobile) will reach by 2012 a 19% market share, and Windows Phone could play a protagonist role in the industry in the following years.

However, predictions in such a fast changing industry demonstrated to be almost always wrong. For instance, as in Ahonen (2012d) “every single analyst who published a position on Nokia smartphones in 2010, said it would grow smartphone sales in 2011.

Every one of them�. Instead, Nokia started to dismiss Symbian and its incredibly fast decline begun. Another example comes from Gartner analysis, who in 2010 predicted an Android market share for 2012 of only 15% (Cianflone and Rusconi, 2011).

Table 3 - Worldwide Smartphone Operating System 2012 and 2016 Market Share and 2012-2016 Compound Annual Growth Rate Smartphone OS 2012 Market Share 2016 Market Share 2012-2016 CAGR Android 61.0% 52.9% 9.5% Windows Phone 7/Windows Mobile 5.2% 19.2% 46.2% iOS 20.5% 19.0% 10.9% BlackBerry OS 6.0% 5.9% 12.1% Others 7.2% 3.0% -5.4% Total 100.0% 100.0% 12.7% Source: IDC Worldwide Mobile Phone Tracker, June 6, 2012

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2.1.4 Symbian OS

The Symbian OS was the Operating System leading the market of mobile platform in the first years of the new millennium. It is a direct descendent of the EPOC OS created

by Psion in the 90s.

In 1998 Psion created a joint venture with Nokia, Ericcson, Motorola and Matshushita (Panasonic), called Symbian Ltd., aiming at creating and advanced Operating System for new emerging smartphone devices (Tanenbaum, 2008).

The first device equipped with Symbian OS 6.0 was launched in 2001, and in few years Symbian’s market shares started growing dramatically, mainly supported by Nokia’s smartphones’ diffusion, up to over 60% in 2007 (see Figure 13 in previous pages).

After iOS and Android release, on December 2nd 2008 Nokia declared to have completed the acquisition of Symbian Ltd. planned few months before, with the intention of creating a Symbian Foundation (with few other smartphone producers) aimed at creating an open-source platform able to compete with the growing iOS and Android. At that time, the former Nokia’s CEO Olli-Pekka Kallasvuo stated:

“Symbian is already the leading open platform for mobile devices. Through this acquisition and the establishment of the Symbian Foundation, it will undisputedly be the most attractive platform for mobile innovation. This will drive the development of new and compelling, web-enabled applications to delight a new generation of consumer. […] The Foundation will make selected components available as open source at launch. It will then work to establish the most complete mobile software offering available in open source. […] The Foundation’s platform will build on the leading open mobile software platform, with more than 200 million phones, across 235 models, already shipped by multiple vendors and tens of thousands of third-party applications already available for Symbian OS-based devices”.

It is useless to say that this is not what actually happened, since Symbian sales dropped year by year. In November 2010 the Symbian open-source experiment officially came to an end. Today its official website states that the Symbian Foundation had completed the transition “from a non-profit organisation responsible for governing the open development of the Symbian platform, to a licensing entity with no permanent staff” (from licensing.symbian.org). All further developments of the platform were realized by Nokia.

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Anyway, when Nokia announced in February 2011 its strategy to switch gradually from Symbian to Windows Phone, all Symbian development activities stopped and today the Symbian OS seems to be destined to be dead soon.

2.1.5 BlackBerry OS

BlackBerry OS is the Operating System installed on all BlackBerry devices, sold by the Canadian company RIM (Research in Motion). As the Apple’s iOS, it is a proprietary OS, not licensed to any other smartphone producers.

At the moment, the last version available is the BlackBerry 7, but at the beginning of 2013 the company should (finally) start selling the first devices equipped with BlackBerry 10, which, according to experts, should be a very performing OS. However, this does not mean at all that it will lead RIM to a success of sales. First of all because the company in the last years lost great part of its market shares, also in those markets where it was the leader, at least in the Business segment, such as the US (Arthur, 2012). Furthermore, BlackBerry 10 seems to be a good OS but not a totally revolutionary one (Epstein, 2012). In addition, since the industry is characterized by huge network externalities, RIM would need to gain great market shares before convincing software developers in developing apps for the new platform. And it will not be easy for the company to convince customers to buy the new BlackBerry 10 devices due to the small installed base of customers and to the fierce competition by iPhone and Android devices.

2.1.6 Palm/HP webOS

WebOS is an innovative mobile platform unveiled by Palm in January 2009. The project demonstrated to be quite a good one, since various experts judged it as a step ahead all competitors at that time (Epstein, 2012a). However, webOS was supported only by Palm, which at the time was not a healthy company at all.

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In 2010 HP acquired Palm for 1.2 billion dollars (and webOS with it), but in 2011 the company decided to abandon the development of the platform, mainly due to the commercial failures of the first webOS devices, HP TouchPad above all.

Eventually, in 2012 the company changed its strategy and at the end of September HP officially released Open webOS 1.0 as an open-source OS for smartphones and tablets (Dello Iacovo, 2012). At the moment, this project represents just a big question mark.

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2.2 Devices’ producers and technologies

Despite an increasingly important phenomenon of servitization in the smartphone industry, the great majority of the revenues still derives from the handset sales (Ahonen, 2012).

As already reported in the introduction of this second chapter, approximately 735 million smartphones will be sold in 2012, with total industry revenue of $210 billion.

The average price of a smartphone will be around $285 (Ahonen, 2012).

Table 4 shows that around 27% of the units sold will cost more than $450, while the 41% will cost less than $149 (Ahonen, 2012).

The data are obtained using the true end-user cost, which is the unsubsidized price of the device. This guarantees that all premium smartphones such as the Apple iPhone or the Samsung Galaxy S3 are included in the first category, even if very often operators sell them at a much lower price (with a 2-3 year long contract).

Table 4 - Smartphones price pyramid

Price range

Units sold (millions)

Percentage

Premium Smartphones

> $450

193

27%

Mid-Price Smartphones

$150 - $499

228

32%

Low-Cost Smartphones

$80 - $149

298

41%

Source: elaboration from Ahonen (2012). Phone Book 2012

Figures 20 and 21 show data about the major players in the industry. The distribution of the smartphones’ sales by brand proves that Apple and Samsung are leading the market, whereas both Nokia and BlackBerry shares are dramatically decreasing.

These are followed today by HTC, Sony Mobile (formerly Sony Ericsson) and several other companies including LG Electronics and the growing Chinese Huawei and ZTE.

Also, the figures below convey the idea that the situation in the smartphone industry changes very fast. For instance Nokia lost very rapidly its leadership position, while Samsung in only two year became industry-leader after having successful followed the Android surge.

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However, the smartphone market is growing very quickly, therefore the reduction in the market shares do not reflect an equivalent reduction in sales.

Figure 20 - Smartphone sales (million units) by brand

Source: Ahonen (2012), Phone Book 2012

Figure 21 - Smartphones market shares by brand

Source: Ahonen (2012), Phone Book 2012

Further considerations about the different users’ segments allow to notice that the Business market is stuck at around 200 million devices (installed base), whereas the Consumer market is soaring up to around 1 billion units. This datum could have been 47

affected by the economic downturn experienced in almost all smartphone market from 2007, due to the lower financial resources owned by the companies worldwide.

Figure 22 - Smartphones installed base: Business and Consumer (million units)

Source: Ahonen (2012), Phone Book 2012

In the business sector there is still quite an important leadership by BlackBerry, mainly due to the very high security guaranteed by BlackBerry OS (BlackBerry OS 7 has been named the most secure mobile operating system; Graziano, 2011). Despite this, Apple’s iPhone in gaining market shares even in this segment.

Figure 23 - Enterprise Smartphone market shares

Source: Ahonen (2012), Phone Book 2012

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In the following sub-paragraphs the main devices’ producers will be presented. Since almost every week new products are released, the reader should consider that the last update has been made on October 15th, 2012.

After that, I will introduce some of the latest technologies that will very likely affect smartphones’ sales in the near future.

2.2.1 Devices’ producers - Samsung

The giant Korean producer of electronic devices is today the market leader in the smartphone industry with approximately 94 million smartphones sold in the first half of 2012 (Q1 + Q2; Ahonen, 2012).

Samsung produces mainly Android devices, despite some models are equipped with Bada (created by Samsung), Windows Phone 7 and Windows Phone 8 (Samsung presented recently at the Berlin IFA 2012 the Samsung Ativ S, equipped with Windows Phone 8).

Samsung’s brand notoriety is mainly due to the success of the Samsung Galaxy S series, composed by the three models S, S2 and S3.

The Samsung Galaxy S (GT-i9000) has been launched on July 2010 as a direct competitor of the iPhone 3GS. The main peculiarities at the time were the powerful single-core 1GHz processor, the 4” Super-Amoled display and 5Megapixel Camera.

The price at the launch was €549 (in Europe) The Galaxy S2 (GT-i9100) was launched in May 2011 and originally price €599. It was the natural development of Galaxy S and included a dual-core 1.5 GHz processor, a 4.3” Super Amoled Plus display and an 8Megapixel Camera.

Samsung announced on October 2011 to have sold 20 million Galaxy S and 10 million Galaxy S2 (Albanesius, 2011).

The final consecration of Samsung as market leader in smartphone industry came in 2012, with the Samsung Galaxy S3 (GT- i9300). This device was one of the first devices equipped with a quad-core processor (1.4 GHz), and a 4.8” HD Super Amoled Plus display. For this model Samsung created a huge marketing campaign in order to attack iPhone supremacy in the highest market segment. The Samsung Galaxy S3 has been sold from May 2012 at a price of €699 (for the 16GB version).

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The company announced in September to have sold 20 million13 Galaxy S3 in the first 100 days from the launch, whereas the Galaxy S2 took about 10 months to reach the same units sales (Epstein, 2012b).

In addition to such a great success in the highest segment, Samsung successfully sells also low-cost and medium-priced devices.

2.2.2 Devices’ producers – Apple On January 9th 2007 the Apple’s co-founder and former CEO proudly presented the first generation of iPhone. He said: “iPhone is a revolutionary and magical product that is literally five years ahead of any other mobile phone. […] We are all born with the ultimate pointing device - our fingers - and iPhone uses them to create the most revolutionary user interface since the mouse” (Apple, 2007).

From then, iPhone intensely contributed to the growth of the smartphones’ market and every single generation of iPhone broke existing sales records in the industry. However, the first generation of iPhone was still not revolutionary as the following ones would have been. Indeed, it was limited to a 2G connection, was not able to record videos, did not allow the ringtones personalization, did not support MMS and was not usable as a modem (many other limitations have not been included).

After that, Apple released other five iPhone version, up to becoming one of the most innovative smartphones ever.

Table 5 - iPhones version and presentation date iPhone version

Presentation date

Still produced?

January 9, 2007

No

iPhone 3G

June 9, 2008

No

iPhone 3GS

June 8, 2009

No

iPhone 4

June 7, 2010

Yes

iPhone

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20 million units represent approximately the 3% of the total annual smartphone sales worldwide. The reader should take into account that the average price of smartphones is $289, whereas the Galaxy S3 had an unsubsidized official price equivalent to around $900. However not all customers paid that amount due to discounts or traffic plan subscriptions.

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iPhone 4S iPhone 5

October 4, 2011

Yes

September 12, 2012

Yes

Source: author elaboration

All iPhone versions are equipped with the iOS operating system. The same iOS can be installed on several iPhone versions. For instance the last version, iOS 6, can be installed on iPhone 3GS and following versions. All iPhones have a non-removable battery and do not support external storage. The quality of processor, camera and display improved radically from version to version up to iPhone 5, equipped with a dual-core A6 processor, 4� Retina display and 8Megapixel camera.

Figure 24 shows the iPhone sales trend up to June 2012 (before iPhone 5), demonstrating that every iPhone version has more success than the previous one (despite the chart groups iPhones sales by period and not by version) and that lots of customers usually wait the new iPhone release, causing the reduction of sales immediately before the new version release.

Figure 24 - iPhone units’ sales by quarter (thousands)

Source: Yarow (2012a). Business Insider. Data source: Company filings

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2.2.3 Devices’ producers – Nokia

The Finnish mobile phone and smartphone manufacturer has been the market leader in the first decade of the new millennium, before being surpassed by both Samsung and Apple. Despite this, the company still detains quite good market shares in Western Europe and in developing Asia (Ahonen, 2012), also thanks to several promotional sales (Nokia Lumia 610 or Nokia N8).

Although the company created its success in the smartphone industry with the Symbian OS, on February 2011 the new CEO Stephen Elop (formerly working in Microsoft) announced that the company’s new smartphones would have gradually been equipped with Windows Phone instead of Symbian, after some unsuccessful experiments with Maemo (Nokia N810) and MeeGo (Nokia N9).

At the moment of this announcement Nokia was still experiencing a growth in both smartphones’ sales and profit, and the Nokia Ovi Store was the second most used app store, after Apple’s one, and it was catching up very fast (Ahonen, 2012d). However, after Elop’s announcement the Symbian ecosystem lost any appeal among developers and customers, and started its quick decline.

The big problems for Nokia came when the first line of Windows Phone devices (Nokia Lumia) did not perform as the company expected, causing incredibly high loss of market shares, revenues and profit. Indeed, on Q2 2012 the Lumia Windows Phones replaced only the 17% of the Symbian revenues in Q4 2010 (Ahonen, 2012d).

Figure 25 - Nokia Strategy 2011: handset revenues mix over time (MeeGo sales not included)

Source: TomiAhonen Consulting from Nokia public presentations. Ahonen (2012d)

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Figure 26 - Nokia, Apple and Samsung Smartphone sales by quarter (million units)

Source: TomiAhonen Consulting Analysis based on companies’ data. Ahonen (2012d)

At the beginning of September 2012 Nokia presented its first devices equipped with Windows Phone 8, the Nokia Lumia 820 and Nokia Lumia 920 (Chang, 2012). The devices are equipped with an Ips PureMotion HD+ display, a PureView 8Megapixel camera with Carl Zeiss optics, wireless battery charging system, etc., demonstrating big efforts by the company in innovation and design.

2.2.4 Devices’ producers – RIM

Research In Motion is a Canadian telecommunications equipment producer founded in 1984 and headquartered in Waterloo, Ontario. The company is worldwide famous for its BlackBerry smartphones, market leader in the business segment, whose first model has been launched in 1999.

The company is led from January 2012 by Thorsten Heins, who replaced Jim Balsillie and Mike Lazaridis (Research In Motion's former co-chief executives).

Despite the company is still fully committed to the further development of its BlackBerry OS, whose version BlackBerry 10 will be launched soon into the market, 53

Heins admitted that the company was seriously considering to switch to Android (Reed, 2012). However, the necessity to be different from competitors, and the need to maintain BlackBerry’s peculiarities (security and BlackBerry Messenger above all), led the company to the decision to go on with its own OS (even if the smaller customer base lead to some issues).

The company sold in Q1 and Q2 2012 around 19 million smartphones, confirming the negative trend of the last years.

2.2.5 Devices’ producers – HTC

HTC Corporation (former High Tech Computer Corporation) is a Taiwanese smartphone manufacturer founded in 1997 by Cher Wang, H. T. Cho and Peter Chou.

The company produces mainly Android devices, even though it obtained also some good results with Windows Mobile and Windows Phone devices.

HTC was the first company selling an Android device (HTC Dream); it recently introduced the first smartphone mounting a quad-core processor (HTC One X) and presented its first Windows Phone 8 devices (HTC 8X and HTC 8S).

The total smartphone sales for the first two quarters of 2012 reached approximately 18 million units, confirming the positive trend of the last years.

2.2.6 Devices’ producers – Others

Sony Mobile This smartphone manufacturer at the end of 2011changed its name from Sony Ericsson Mobile Communications to Sony Mobile Communication, when the Japanese company Sony Corporation paid 1 billion euros to Ericsson for the remaining part of the original joint venture (Virki, 2011). The company produces at the moment only Android devices and in the first two quarters of 2012 sold around 15 million smartphones (Ahonen, 2012).

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Huawei This Chinese ICT solution provider is growing quite fast also in smartphone industry, reaching in the first half 2012 around 14 million units sold (Ahonen, 2012). Even if the company’s main focus in on low-cost device (often sold under the operators’ name), it recently launched some innovative model targeting the highest market segments (Huawei Honor, Ascend D1 quad, Ascend P1s, etc.).

ZTE ZTE is another Chinese manufacturer who managed to increase its market shares mainly through competitive price and good relation with operators. In the first half of 2012 it sold around 13 million smartphones (Ahonen, 2012).

LG Electronics LG Electronics is a Korean electronic devices manufacturer, recently entered in the Smartphone industry, despite quite a long experience in Mobile Phones production. The company, which sold 12 million smartphones in the first half of 2012 (Ahonen, 2012), will be examined further in last chapter of this paper.

Motorola Motorola is an American multinational company operating in the telecommunication industry. After pioneering the Mobile Phones industry in the 90s, the company faced some difficulties in the switching process to smartphones. Motorola Mobility sold around 11 million smartphones in the first half of 2012 (Ahonen, 2012) and has recently been bought by Google for approximately $13 billion.

2.2.7 Devices’ technologies - LTE

The primary reason to buy a smartphone is the easiness to access to the web (Ericsson, 2012). This explains why one of the main features able to affect smartphone sales is the network generation the device uses, since it determines the internet connection speed.

The increasing usage of mobile data, related to a greater diffusion of smartphones and to

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new smartphone services such as video or music streaming and online gaming apps, led to the necessity to develop a new faster generation of mobile networks.

After an initial phase where the Wi-Max technology seemed to be destined to a great success, a new technology, faster and more compatible with the existing equipment, appeared and succeeded where Wi-Max failed, that is starting a very fast expansion.

(Segan, 2012).

This new technology is the Long Term Evolution (LTE), which reaches a theoretic download speed of 100 Mbit per second (latest HSDPA technology reached 42,2 Mbit per second).

LTE networks will contribute to an intense increase of the web-based services for smartphones, such as web-TVs, cloud computing, etc.

Nowadays LTE network are already installed (or will be ready soon) in most of the developed countries, despite a complete coverage would need several years.

A study by Jefferies’ analyst Peter Misek ranked the companies detaining the essential LTE patents. The results show that LG Electronics leads this ranking owning around 23% of the key patents, followed by Qualcomm (21%), Motorola Mobility (9%), Interdigital (9%), Nokia (9%), Samsung (9%), ZTE (6%), Ericsson (2%), RIM (1%), Huawei (1%), Freescale (1%) and NEC (1%) (Savitz, 2012). Apple is not even in the list, whereas LG Electronics efforts in innovation are already paying off, since the company’s shares soared in those markets where LTE networks are already installed.

2.2.8 Devices’ technologies – NFC

Near Field Communication (NFC) is a technology allowing transferring small amounts of data between two NFC-enabled devices positioned one next to the other. These data could include phonebook entries, phone settings, advertising, etc.

However the great interest for the NFC technology is linked to the possibility to use the smartphone as a payment method alternative to money and credit cards. Other possible uses include all those activities now requiring a contactless smartcards, such as subway entrance systems, employees’ identification in workplaces, etc.

Despite the huge interest worldwide, Apple did not include an NFC antenna in the iPhone 5, as on the contrary has been done by all main competitors.

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2.3 Community

This paragraph will include all the community-related elements affecting in some way smartphones’ sales. The theory about network externalities is very important to understand how a bigger customer base positively affects the sales of a product, especially in young and rapidly changing industries, such as smartphones’ one.

Curwen (2010) limited this community-related element just to the smartphones’ apps (he concentrated his attention only on the community of software developers who create and distribute their software for mobile platforms).

However, the phenomenon is a lot more complex, since there are other communityrelated elements who can positively or negatively affect the smartphones’ sales and could seriously contribute to the success (or to the failure) of companies (Ericsson, 2012).

Very often, indeed, the community surrounding a product had a great importance on the future success of the product. For instance, when on August 25th the student Linus Torvalds released (for free) Linux, a huge community started contributing to it, up to transform Linux to a worldwide famous OS-family. Today Linux is the base of Android, the most popular mobile platform.

Another example comes from Arduino, the first open-source hardware, created by a team of engineers led by Massimo Banzi. They decided to release it as an open-source project in order to obtain the contribution of the community of developers, who actually improved the original project and creates every day hundreds of Arduino-based systems. As a result, today Arduino is famous worldwide and an Arduino-based board is even used to measure some parameters in the Large Hadron Collider built by CERN in Geneva (Banzi, 2012).

In the following pages I am going to provide a brief introduction of the most important of those community-related elements affecting the sales of both smartphones and of related services. Each of these elements would require hundreds of pages to be fully described; therefore I am going to provide only a preliminary description supported by some useful data.

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2.3.1 Apps and Apps Stores

The true innovation introduced by iOS and Android was the possibility to fully personalize the smartphone according to the user needs through the installation of thousands of applications (apps). Even more revolutionary was the possibility to download and install those apps directly from the device, whereas previous OS needed a manual installation from a Computer.

In very few years this led to the creation of hundreds of thousands of those apps generating in 2012, according to Gartner, around 27 billion dollars in revenues (Figure 27).

Figure 27 - Forecasts mobile apps store revenues 2008-2014 (USD millions) 70000 60000 50000 40000 30000 20000 10000 0 2008

2009

2010

2011

End-user spending

2012

2013

2014

Advertising Revenues

Source: elaboration from Gartner (2011). End-user includes both paid downloads and in-app purchasing.

Most recent data report that in 2012 the apps downloaded will be approximately 45 billion and this number will increase very fast year by year, up to reach in 2016 approximately 300 billion of downloads (Table 6).

Though, the great majority of the apps are downloaded for free (and the only revenues for apps’ developers come from advertising or in-app purchases).

Indeed, a study conducted by Nielsen (2012) demonstrated that 51% of apps’ users are glad to accept in-app advertising when they can download the app for free. The study 58

reported that usually customers download on their device a combination of both free and paid apps, and that those users who downloaded only free apps in the past month, downloaded mainly games (33%), social networks (20%) and music (18%). Consumers who also downloaded paid apps, instead, chose games (35%), maps or navigation software (29%) and music (27%).

Lunden (2012) reported that by 2016 the 96% of paid apps will cost less than $3 and a strong increase of in-app purchases (IAP) will be registered. In 2011 apps including IAP were just the 5% of all apps in 2011 and accounted for only 10% of revenue, whereas by 2012 the number of these apps will reach 30% contributing to the 41% of revenues.

Table 6 - Mobile App store downloads worldwide 2010 - 2016 (millions of downloads) 2011

2012

2013

2014

2015

2016

Free Downloads

22.044

40.599

73.280

119.842

188.946

287.933

Paid-for Downloads

2.893

5.018

8.142

11.853

16.430

21.672

Total Downloads

24.936

45.617

81.422

131.695

205.376

309.606

Free Downloads %

88.4%

89.0%

90.0%

91.0%

92.0%

93.0%

Source: Gartner (September 2012)

Figure 28 - Top app categories. Percentage of tablet and smartphone users who downloaded an app in the past 30 days

Source: Nielsen (2012)

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At the moment there are several different platforms from which users can download apps. However, as already said, Apple does not allow iOS users to download anything from sources different for the official store.

At the moment, the main stores are the Apple App Store, including around 650.000 apps available for download, Google Play Store (previously called Android Market, with around 600.000 apps) and Windows Phone Store, which at the moment has only 100.000 apps (anyway Microsoft’s strategy is to increase massively the number of available apps in the next months) (Romano, 2012).

Ahonen (2012) provided official revenues data about Apple App Store, and reported that only the 11% of the Apps downloaded from it are paid, which is in line with the industry average.

Figure 29 - Apple iPhone App Store metrics

Source: Ahonen (2012), based on consulting analysis on Apple official data 2012

Besides these main official stores, countless others are appearing and gaining market shares. Above all there are the stores by Cydia (alternative store for jailbroken iOS) Facebook and by Amazon. Other stores have been created by devices’ producers such as Samsung, HTC or LG. Nakajima (2012) created the expression battle of platforms, declaring that:

“The battle is not simply between OS vendors, but involves several high profile players battling to become the dominant platform in linking user and content.

Content is not exclusive to a given platform, and thus the same contents can be offered for the same price or the same experience. In such circumstances, the platform providers are battling it out to become the dominant platform player, in order to be able to control the flow of user data and the associated revenues that will come with it”.

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As a demonstration of the importance of apps for smartphones’ sales, a very interesting study by Ericsson (2012) proved that the apps’ availability is a very significant driver for smartphones adoption in fast growing markets such as Brazil, India and Russia, since 33% of respondents confirmed that “to be able to use/access more apps” is a good reason to buy a smartphone.

Figure 30 - Reasons to buy a Smartphone (% of respondents)

Source: Ericsson (2012)

Figure 31 - Shares of respondents who use the following apps daily

Source: Ericsson (2012)

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Few years ago an Apple’s advertising proclaimed that for everything there is an app, and this is actually very close to the truth. The most used apps however, are related to social networking, messaging, news, weather forecasts and games.

A recent study by Nielsen (2011) gathered data about the most downloaded apps on Android devices. The great majority of the most popular ones are actually Google’s apps included in all Android device, except Facebook, which demonstrated to be the most downloaded App, if not considering the Android Market (now Google Play Store).

Smartphones’ apps, anyway, have a miriad of possible applications and are being used for very different purposes and in a lot of different areas. For instance apps are created even in health sector, where they can help monitoring patients’ conditions (Fontecha et al., 2012). Alternative use include geo-localized services (Pannone, 2011) or the reduction of phone traffic consumption using VoIP services (Shin, 2012), etc.

Figure 32 - Mobile Apps reach by age. The percentage refers to the respondents who have opened the App in the past 30 days out of the total number of respondents

Source: Nielsen (2011)

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2.3.2 Blogs and reviews

As for all hi-tech products, blogs and reviews seriously affect customers’ decisions when it comes to buy a new smartphone, and therefore smartphones’ producers have to take care of them.

At the beginning of 2012 Forbes made a ranking of the ten most powerful influencers in the mobile industry, and Tomi Ahonen (former Nokia executive) has been elected first of them. With their blog/articles/consulting activities they reach millions of customers and hundreds of managers worldwide, and they affect their decisions.

Table 7 - Top 10 powerful influencers in Mobile Name

Reach

Resonance

Relevance

1

Tomi Ahonen – Communities Dominate Brands

77

73

91

2

Gary Kim – IP Carrier

27

55

100

3

Ingrid Lunden – PaidContent

56

81

83

4

Sue Merek – FierceWireless

73

70

81

5

Varun Krish – Fone Arena

65

26

94

6

Tom Krazit - PaidContent

54

71

81

7

Vaibhav Sharma – TheHendheldBlog

40

30

96

8

Steven J. Crowley – Steven J. Crowley, P.E.

34

36

85

9

Zach Epstein - BGR

62

45

63

10

K. Kugan – Malaysian Wireless

44

30

66

Source: Shaughnessy (2012), Forbes

Of course every single country has hundreds of those blogs, even if very often only few of them are actually relevant. Anyway, some blogs are followed by people from all over the world, such as techcrunch.com, bgr.com, paidcontent.org, communitiesdominate.blogs.com, etc.

Blogs and smartphones’ reviewers have been very active also in Italy, which is the sixth largest market for mobile phones, with $8.1 billion of sales (Ahonen, 2012) and around seven millions smartphones sold in the last year (GfK).

Data from Twitter followers or Facebook likes provide evidence about how many single users are interested in having continuous information about the mobile industry (Table 8), whereas the number of visualizations of the main video-reviews on YouTube

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demonstrates how many people are interested in blogs’ information and suggestion, especially before buying a Smartphone (Table 9).

Table 8 - Number of followers/likes of the main Italian mobile blogs Blog

Twitter

Facebook

iPhone Italia

35.628

162.153

TuttoAndroid

21.366

35.485

AndroidWorld

100.682

26.256

Telefonino.net

19.151

23.450

117.806

22.808

Pianetacellulare

1.073

11.130

Batista70phone

11.281

4.311

3.261

4.214

Androidiani

CellularMagazine.it Source: author elaboration. Last update: 15/10/2012

Table 9 - Number of visualizations of some YouTube video-reviews (thousands) Video

Visualizations

Time

iPhone 5 - Telefonino.net

731

3 weeks

iPhone 4s vs. Galaxy S3 - Telefonino.net

580

3 months

Galaxy S3 - Telefonino.net

464

4 months

iPhone 5 vs. Galaxy S3 - Telefonino.net

458

1 week

iPhone 5 vs. iPhone 4s - Telefonino.net

189

2 weeks

Galaxy Note – Telefonino.net

111

1 week

Source: author elaboration, YouTube.com

2.3.3 Independent software developers

Smartphone community is crowded of independent hackers and software developers working to improve the performances of the original smartphones’ software provided by producers, or to eliminate the limitations included by them.

As in Kushner (2012), “every hack poses the same basic challenge: how to make something function in a way for which it wasn’t designed. In one respect, hacking is an act of hypnosis. […] the secret is to figure out how to speak to the device, then persuade it to obey your wishes”.

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The existence of such big communities of developers has been very important in smartphone development since they actually contribute to improve both performances and security of the original OS. For instance, on August 18th 2012, the famous hacker Pod2g announced he had discovered quite a dangerous vulnerability in iOS handling of text messages, existing from the very first iOS version of 2007 (Mack, 2012).

However, the main target of these communities is to fully personalize smartphones and remove limitation imposed by producers.

George Hotz (known as GeoHot) indeed is the first hacker who succeeded in breaking iPhone protections in 2007 (when he was 17) in order to use his device with networks different from AT&T one. The YouTube video where GeoHot announced he managed to hack the iPhone received around two million views, and he received compliments even by Steve Wozniak, Apple’s co-founder (Kushner, 2012). From then, every single iOS version has been jailbroken by hackers who wanted to install software not approved

by Apple. After quite a long legal dispute, the jailbreak has been declared legal by the U.S. Copyright Office on July 18th 2010 (Goldman, 2010). Despite this, Apple never approved this activity and the legal status of jailbreak in Europe is still not clear.

As a signal of the diffusion of jailbreak on iOS device, Cydia, the app store for jailbroken iOS device created by the hacker Jay Freeman (also known as Saurik), gets more than $10 million of annual revenues and about 4.5 millions of active weekly users looking for apps (Shapira, 2011).

On the Android side, several (huge) communities of developers appeared, mainly due to the open-source nature of the Android OS which legally allows to create new software or to improve existing ones. One of the biggest of these communities is XDA Developers (xda-developers.com), whose website has almost five millions registered user and a lot more visitors.

Others Android communities follow instead very specific projects, such as those creating totally independent Android version installable on the most famous devices.

The final products are customized aftermarket firmware for Android devices available to customers totally for free, and very often these firmware are dramatically better performing than the original ones.

Very famous is CyanogenMod created by the homonymous community, installed at the moment on almost 3 million devices (with approximately 20.000 new installations a day; official data from CyanogenMod community). Other very famous cooked ROMs 65

(as they are called in the developers and users community) are MIUI, Android Revolution HD and FoxHound.

As a demonstration of the quality of these firmware and of the ability of those developers, CyanogenMod’ founder, Steve Kondik, has been hired in 2011 by Samsung (Hamburger, 2011), George Hotz worked instead with Facebook (Raice, 2011) and several other hackers/developers have been hired by the biggest companies in smartphone industry.

2.3.4 Brand communities

In literature, several researches demonstrated that customers satisfied with a particular brand very often create and participate to communities composed by people sharing admiration for that brand (Casaló, Flavián and Guinalíu, 2010).

In addition, there is a direct relation between the level of participation to the community and the loyalty to the brand. All these elements influence the community promotion toward people still not in the community (Casaló, Flavián and Guinalíu, 2010).

The phenomenon is particularly relevant in the smartphone industry, since iPhone is surrounded by a huge community of satisfied customers loyal to the brand and promoting it to people not in the community. J.D. Power and Associates (2011) reported that for the fourth consecutive year Apple ranked first in customer satisfaction among smartphones’ manufacturers, performing particularly well in ease of operation, physical design and OS. Besides customers’ satisfaction, iPhone has been proved to generate some hedonic and social positive effects, which increase the desire to be part of that community (ArrudaFilho, Cabusas and Dholakia, 2010; Kraappa, 2011).

However, Arruda-Filho and Lennon (2011) found out that some customers (truly interested in innovation) experience a decrease of the feeling of affiliation during the years. They stated that:

“While the original iPhone v1 was seen as very cutting edge, successive releases (the iPhone 3G and iPhone 3GS), were far less innovative. […] This raises the question: will innovation seeking consumers abandon the iPhone for a newer, more technologically innovative device? This study suggests

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that innovators prefer really new products instead of upgraded ones, because they cannot see the advantage of using an upgraded version of a product which has already been widely adopted.

This means that there is a part of customers who will be loyal anyway to a particular brand, while some others could be moved by the desire to be pioneers in new products adoption and could switch to emerging and more innovative brands.

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CHAPTER 3. Sales drivers in Smartphone industry

3.1 Purpose

At the moment Apple iPhone and the Samsung Galaxy S-series demonstrated to be the most successful devices in terms of sales, despite they were not technologically superior to all the other competitors. In particular the Samsung Galaxy S, S2 and S3 managed to stand out from countless other very similar device (equipped with the same Operating System, including analogous technologies and sold at a very similar price), suggesting the existence of several drivers of success.

Research Question 1: What are the main elements determining the success or the failure of a Smartphone in such a competing industry?

Hypothesis: the main drivers of success in Smartphone industry are (1) the innovation and diffusion of the Operating System and (2) the innovation related to Device Technology. These two elements are not related (and often different companies are involved), and a perfect combination of them is necessary to guarantee a sales success.

Research Question 2: is the community surrounding the Smartphone industry able to affect Smartphone sales?

Hypothesis: Yes, the community of customers, bloggers and software developers contributes to the success or failure of a Smartphone.

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3.2 Relevant stories in smartphone industry

3.2.1The integrated approach, the iPhone winning strategy (for now)

A recent study conducted by the Canaccord Genuity analyst Michael Walkley revealed that Apple iPhone sales are growing very fast and the company in 2013 will sell approximately 200 million iPhones (Epstein, 2012c).

To explain such a big success, Dediu (2012a) stated that “Apple is the most valuable company in technology (and indeed in the world) because it integrates hardware, software and services. It’s the first, and only, company to do all these three well in service of jobs that the vast majority of consumers want done”.

And the most successful of the company products is the iPhone, which is also the company’s main profit source (Asymco data, as in Dediu, 2012b).

Figure 33 - Apple's estimated Gross Margins (GM) by product

Source: Asymco, 2012

Also, iPhones sales represent the 6% of the total units’ sales in the smartphone industry, generating the 43% of the revenues and the 77% of the profits (Paczkowski, 2012).

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Figure 34 - Apple vs. non-Apple revenues globally

Apple

non-Apple

Source: Raymond James estimates, as in Paczkowski (2012)

Figure 35 – Profit shares of mobile computing industry

From the top: • HTC • Apple • RIM • Samsung • Nokia • All others

Source: elaboration from Raymond James estimates, as in Paczkowski (2012)

Today it seems that the integrated approach in smartphone industry is the winning strategy (Dixon14, 2012), and it has been copied by several actors in the industry (Google recently bought Motorola, and Microsoft just presented its own tablet, the

14

Chris Dixon is Co-founder/CEO of Hunch (acquired by eBay) and “personal investor in technology startups, including Hipmunk, Foursquare, Kickstarter, Stripe, Pinterest, Dropbox, Skype, Behance, Canvas, Codecademy, Stack Overflow, Gerson Lehrman Group, Bloomreach, Optimizely, TrialPay, Panjiva, OMGPOP (acquired by Zynga), Truaxis (acquired by Mastercard), DocVerse (acquired by Google), Invite Media (acquired by Google), ScanScout (acquired by Tremor Video), and some other startups that haven’t publicized investments yet” (cdixon.org).

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Surface, and is secretly testing its own Windows Phone 8 smartphone, as in Bryant, 2012).

Actually, “there is a trade-off between integrated and non-integrated approaches to building devices. The non-integrated approach lowers costs, but adds friction between components that compromises performance” (Dixon, 2012).

In addition, “without

complete standardization across the industry, it can be difficult to create products that are reliable, secure, and intuitive and that perform well consistently” (Frey, 2012).

Wingfield (2012) reported an anecdote related to Microsoft’s first attempts to build tablets with hardware partners:

“the H.P. tablet was thick, the Intel processor it used made the device hot, and the software and screen hardware did not work well together, causing delays whenever a user tried to perform a touch action on its screen. <It would be like driving a car, and the car not turning when you turn the wheel> the former H.P. executive said”.

However, “what is the difference between mobile devices today where the integrated approach is winning and desktops PCs in, say, 1995, when the non-integrated approach dominated? The best way to understand the difference is through the lens of Clay Christensen’s disruptive technology theory15” (Dixon, 2012).

According to this theory, soon or later smartphone technologies will become “good enough” and the Apple strategy could not be anymore the most successful one. Indeed, a non-integrated approach would guarantee lower costs and lower prices for customers, maintaining an adequate level of technology development.

The question, then, is when this transition will happen? According to Dixon (2012) it will take at least 5-10 years before customers will not be willing to pay significantly higher prices for faster processors, longer battery life, more features, etc.

15

As in Dixon (2012): “When a new category of device first launches, it is usually not “good enough” for most customers. […] According to Christensen, technology gets better at a faster rate than customers’ demands on technology […]. Eventually, new device categories become “good enough” […], and customers become unwilling to pay significantly higher prices for improved versions of the device. At this point it doesn’t make sense for manufacturers to invest in greater performance if customers won’t reward that investment. Instead, manufacturers should spend the “performance surplus” on making devices less expensive. The best way to do this is to let different companies produce the core software and hardware components, i.e. to switch from an integrated to non-integrated approach”.

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However, nobody is actually able to predict what will happen in the future in smartphone industry, especially if considering that even Christensen himself did not fully understand the innovation introduced by smartphones and by iPhone above all.

As reported by Madrigal (2012), in 2007 Christensen told BusinessWeek that:

â&#x20AC;&#x153;The iPhone is a sustaining technology relative to Nokia. In other words, Apple is leaping ahead on the sustaining curve [by building a better phone].

But the prediction of the theory would be that Apple won't succeed with the iPhone. They've launched an innovation that the existing players in the industry are heavily motivated to beat: It's not [truly] disruptive. History speaks pretty loudly on that, that the probability of success is going to be limited.â&#x20AC;?

Indeed, Christensen thought that iPhone was just a fancy phone and did not realize that it was actually disruptive to laptops (Macfarquhar, 2012), since it guaranteed a very quick access to Internet, Emails and other web-contents.

Anyway, there is some evidence that Christensen could be right in few years. Despite iPhone 5 is setting new sales records, some people are already complaining since latest iPhones are not as innovative as they used to be in the past (Mui, 2012; Lyons, 2012), and the combination Samsung-Android at the moment is working pretty well.

Asymco founder Dediu asserts that there will come a point in which Apple will not be able to improve further the iPhone (for instance, he noted that it is impossible to improve a display beyond Retina resolution, because human eye would not notice the difference). At that point the company will need to find other ways to compete, such as cutting prices, reducing the famous above-mentioned margins (Ackerman, 2012).

3.2.2 Samsung Galaxy S3 After the good results obtained with the Galaxy S and the Galaxy S2, on May 3rd of 2012 Samsung launched the Galaxy S3, which seems to be the first smartphone able to truly compete with iPhones. As a demonstration, in August Galaxy S3 sales (in US) exceeded iPhone 4S ones (Yarow, 2012b), even if quite a number of customers could have been waiting for the iPhone 5 release in September.

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At the moment Samsung already sold more than 20 million Galaxy S3 (Epstein, 2012b) and plans to hit 30 million units sold by the end of the year (Epstein, 2012d).

Once more, the secret of this success is a very good combination of a “high-performing hardware and creative software features” (Cnet, 2012).

The Galaxy S3 originally mounted an optimized version of Android 4.0 (Ice Cream Sandwich), but it has already been updated to Android 4.1 (Jelly Bean). Also, Samsung had the merit to have introduced some simple but fetching software features able to arouse people curiosity, as happens with iPhones.

For instance the device doesn’t go into sleep-mode when the user is looking at the screen (Smart Stay). Moreover, when the user, while reading a message, browsing a contact or checking missed calls, raises the device to the ear, it directly calls the contact (Direct Call). In addition, Samsung wisely advertised a number of very interesting features included in Android such as the Face Unlock, the Android Beam (which permits to transfer files through NFC), Google Maps, etc.

The company paired such excellent software with a very performing hardware, mounting a 1.4 GHz quad-core processor, a 4.8” HD Super Amoled display (whereas iPhone 5 has a 4” Retina display) and an NFC antenna (missing in the iPhone 5). In some countries the LTE version is also available.

However, many other Android devices have very similar characteristics, such as the HTC One X or the LG Optimus 4X HD, and therefore there must be something else leading customers to prefer Galaxy S3 among all these other similar devices.

First of all, Samsung spent a huge amount of money for its Galaxy S3 marketing campaign, which has been the most expensive one in Samsung history (Young, 2012).

Secondly, Samsung managed to create “the kind of frenzy around the launch that has become the norm for Apple's new gadgets” (Kim and Sandle, 2012). The company, unless other main competitors selling Android devices, decided to do not present the new device at the Mobile World Congress 2012, and kept all details secret until the day of the launch, May 3rd 2012. “Anticipation surrounding Samsung’s flagship Galaxy S III smartphone was at an all-time high for an Android device, nearly matching that of an Apple iPhone or iPad” (Graziano, 2012).

Also, Samsung realized that “a particular focus must be given to serving new customer experience and value by strengthening soft capabilities in software, user experience, 74

design and solutions”, as stated by the company’s new CEO Kwon Oh-hyun (Epstein, 2012e).

The company understood that in the near future being just another Android phone vendor won’t be enough to win the competition in the industry, and therefore it is looking for ways to separate itself from the pack (Geller, 2012).

And actually Samsung succeeded in overwhelming all the other smartphone producers using Android, but still it is very far from Apple in terms of profitability. The Korean company gets the 29% of the whole smartphone industry profits, whereas Apple gets 77% (Paczkowski, 2012). All the other competitors get losses or very small profits.

3.2.3Palm/HP webOS history

When webOS was presented by Palm in January 2009, it managed to catch the attention of the main players in the industry, also because Android and iOS were still not as powerful as now, and because Palm had already a good expertise in PDAs production.

Some experts in the industry defined it as gorgeous, with a unique and appealing design and with smart and intuitive gesture-based controls. Epstein (2011) said:

“iOS revolutionized the smartphone OS by placing apps at the center of the user experience. WebOS took this concept a step further by placing the task manager, or the apps that are currently in use, at the center of the user experience. Palm’s card system was brilliant, and it changed the way people accessed commonly used apps. WebOS was also gorgeous to look at, and with the right hardware — I was lucky enough to spend a few weeks with the Pre3 recently — it’s also remarkably fluid”.

Burns (2011) stated that “it has the swankiness of iOS, the multitasking of Android; all built by the folks that started it all, Palm”.

Two years before, in 2007, when the competition in smartphone industry was about to start, Palm was planning to build a new improved mobile platform in order to compete with the just born iPhone and with Nokia’s Symbian. The company hired a former Apple executive, Jon Rubinstein, who led the team creating webOS and introducing Palm’s first webOS smartphone, the Palm Pre (Isaac, 2012).

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Steve Jobs was aware of the potential thread Palm represented for Apple’s growth strategy and he was concerned that Rubinstein was hiring Apple employees.

As reported to Bloomberg by Palm’s former CEO, Ed Colligan, Jobs even asked for a mutual agreement to do not hire each other employees (Guglielmo, 2009).

On April 28th, 2010, the PC producer HP announced on its website to have completed Palm acquisition:

“HP and Palm, Inc. today announced that they have entered into a definitive agreement under which HP will purchase Palm,[…] [at] an enterprise value of approximately $1.2 billion. […] The combination of HP’s global scale and financial strength with Palm’s unparalleled webOS platform will enhance HP’s ability to participate more aggressively in the fast-growing, highly profitable smartphone and connected mobile device markets. Palm’s unique webOS will allow HP to take advantage of features such as true multitasking and always up-to-date information sharing across applications.

Jon Rubinstein, who in the meanwhile became new Palm’s CEO succeeding to Ed Colligan, affirmed: “We’re thrilled by HP’s vote of confidence in Palm’s technological leadership, which delivered Palm webOS and iconic products such as the Palm Pre. […]

We look forward to working with HP to continue to deliver industry-leading mobile experiences to our customers and business partners” (HP, 2010).

However, despite such good makings, webOS failed to succeed in smartphone and tablet industry (HP TouchPad was a failure), and on August 9th, 2011 Biggs wrote on TechCrunch:

“I love the TouchPad and the Pre 3 is a good phone. But there is just no room for a third (or fourth (or fifth)) player in the smartphone market right now with Android and iOS battling it out and Windows Phone creeping up behind. HP can’t pivot out of this and, in the end, they’ll pull the plug.

Maybe not this year, maybe not this CES, but by 2013 we’ll be writing WebOS’ obituary” (Biggs, 2011).

Less than 10 days later, on August 18, 2011, HP announced it would have discontinued all operation for webOS devices, sixteen months after Palm acquisition (Epstein, 2011).

The webOS experiment caused to HP a loss of around 3.3 billion dollars (Velazco, 2011).

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Still, people are questioning about why webOS failed. “Sad though it may be, webOS never stood a chance. The Pre’s unveiling was immediately eclipsed by the iPhone 3G, and by the time HP got to it, it was far too late” (Epstein, 2011).

WebOS was “an amazing OS killed by natural selection” (Burns, 2011), since smartphone and tablet could just not sustain too many different platforms (Burns, 2010).

He said:

“A product’s success ultimately comes down to units sold, right? Well, in order to sell units, a device needs to have functions. In order for the device to have functions, developers need to be on board and units need to be sold in order to attract developers. This is the not-so-secret sauce behind iOS devices” (Burns, 2010).

However, as already reported in the previous chapter, webOS is still not technically dead, since it was converted in an open source project. Recently, the first version of Open webOS has been released, although it is still not being used in any device in the market (Dello Iacovo, 2012).

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3.3 Blogs activity in Italy

In this paragraph some data about Italian blogs dealing with smartphones and mobile phones will be presented. These data are mostly obtained from Google Display Network Ad Planner, which is a free online tool very useful to evaluate websites’ popularity. It provides also statistics about the age and gender of the website’s visitors, despite data about people younger than 18 are not collected (probably due to legal liability).

In the last part of the paragraph, an interview to the Tuttoandroid.net founder will be reported.

In Italy countless blogs bring out daily news, rumours and reviews about smartphones or smartphone-related elements. Among them, few blogs emerged and became a point of reference for all Italian smartphones’ users. Some of those blogs are specialized on a particular Operating System (Iphoneitalia.com, Androidworld.it, Androidiani.com, Tuttoandroid.net, etc.), whereas some others deal with both feature phone and smartphones, and with different smartphone platforms (Telefonino.net and Hdblog.it above all).

At the moment Telefonino.net is the most visited mobile blog, with around two million monthly visitors, which is a very high number considering that the blog’s language is only Italian and that Italy has around 60 million inhabitants (Istat, 2012). The main reason is that it deals with all kind of mobile phones and it includes very interesting reviews and data about all mobile phones sold in Italy.

The second most visited blog is Androidiani.com, which is the biggest Italian blog specialized on Android devices (including therefore also tablets). It is visited monthly by approximately 1.7 million different users.

Iphoneitalia.com instead is the most famous Italian iPhone blog, dealing exclusively with iPhones and iOS, which registered around 1.1 million monthly visitors.

From a gender perspective, men seem to be more interested than women about mobile blogs (from 61% to 69% of visitors are men, as in Table 10). Visitors are also usually adults (from 25 to 44 years old). Data among different blogs are very similar one to the other and there is not any significant difference both in gender and age distribution (Table 10).

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Table 10 - Unique monthly visitors; visitors’ age and gender Blog

Age distribution

Unique

Gender

visitors 18-24 25-34 35-44 45-54 55-64 ≥ 65

Male

Female

Telefonino.net

2.0 M

15%

26%

36%

13%

7%

3%

65%

35%

Androidiani.com

1.7 M

15%

27%

38%

11%

5%

3%

68%

32%

Hdblog.it

1.3 M

17%

28%

36%

10%

5%

3%

69%

31%

Androidworld.it

1.2 M

17%

28%

36%

11%

6%

3%

68%

32%

Iphoneitalia.com

1.1 M

19%

29%

32%

12%

6%

3%

63%

37%

Pianetacellulare.it

0.7 M

16%

24%

34%

14%

8%

5%

61%

39%

Source: Google Display Network Ad Planner. Data from 24/09/2012 to 23/10/2012. Retrieved on 28/10/2012

Table 11 reveals very remarkable information about the interests of mobile blogs visitors. Telefonino.net and Puntocellulare.it readers are frequently interested in “Product Reviews & Price Comparisons” and “Mobile Apps & Add-Ons”, whereas readers of Android-related blogs are mostly interested in “Android Apps”, “Linux & Unix” and “Open Source” in general.

Table 11 - Interests and sites also visited by visitors of the top Italian mobile blogs Blog

Iphoneitalia.com

Hdblog.it

Telefonino.net

Androidworld.it

Sites also visited (top 5)

Audience Interests (top 5)

genius.ispazio.net

Mac OS

ispazio.net

Mobile Apps & Add-Ons

apple.hdblog.it

Operating Systems

melablog.it

Smart Phones

biteyourapple.net

Communications Equipment

android.hdblog.it

Tablet PCs

forum.hdblog.it

Android Apps

mobile.hdblog.it

Linux & Unix

samsung.hdblog.it

Operating Systems

altadefinizione.hdblog.it

Laptops & Notebooks

forum.telefonino.net

PDAs & Handhelds

puntocellulare.it

Mobile Phones

android.hdblog.it

Product Reviews & Price Comparisons

pianetacellulare.it

Mobile Apps & Add-Ons

androidworld.it

Communications Equipment

nexus-lab.com

Linux & Unix

hardware-programmi.com

Open Source

forum.hdblog.it

Android Apps

79

Androidiani.com

Pianetacellulare.it

androidgalaxys.net

Laptops & Notebooks

android.hdblog.it

Mobile Apps & Add-Ons

androidgalaxys.net

Android Apps

hardware-programmi.com

Linux & Unix

forum.hdblog.it

Open Source

nexus-lab.com

Mobile Apps & Add-Ons

xda-developers.com

Laptops & Notebooks

puntocellulare.it

PDAs & Handhelds

schede-cellulari.it

Customer Services

nexus-lab.com

Consumer Resources

android.hdblog.it

Product Reviews & Price Comparisons

tuttoandroid.net Mobile Apps & Add-Ons Source: Google Display Network Ad Planner. Data from 24/09/2012 to 23/10/2012. Retrieved on 28/10/2012

Not included in the previous tables is Tuttoandroid.net, which at the moment is one of the three biggest Android blogs in Italy, together with Androidworld.it and Androidiani.com.

It has been founded in 2009 by Mikhael Costa with two of his friends, who left the organization soon after. He run the blog entirely alone for approximately two years and only in 2011 he decided to involve other editors, mainly due to the increasing complexity of the Android devices market.

At the moment Tuttoandroid.net has around 1 million unique visitors monthly and nearly 3.5 million pages viewed (Mikhael Costa, personal communication, 26/10/2012).

The blog is growing quite fast and currently it has on average around 250 visitors online, ranging from 30 during night-time to around 1000 in peak hours (data available at http://whos.amung.us/stats/history/gn93uouj8th4/).

The forum community is also growing, and at the moment it has around 44 thousands registered users (Tuttoandroid.net, retrieved on 27/10/2012). The founderâ&#x20AC;&#x2122;s strategy is targeting a rapid growth of the Forum community, which would permit to obtain better conditions on advertising contracts and a better indexing by search engines.

The blog demonstrated to be a widely used source of information for people interested in Android smartphones. The statistics provided by Google Ad Planner show that the great majority of Tuttoandroid.net visitors is from 25 to 44 years old (67%), divided into 25-34 (28%) and 35-44 (39%).

In addition, Figure 38 shows that 70% of the users are men.

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Figure 36 - Average and maximum Tuttoandroid.net visitors on the website

Maximum

Average

Source: elaboration from Tuttoandroid.net statistics, from http://whos.amung.us/stats/history/gn93uouj8th4/

Figure 37 - Tuttoandroid.net visitors age distribution

Source: Google Display Network Ad Planner, retrieved on 27/10/2012

Figure 38 - Tuttoandroid.net visitors gender distribution

Source: Google Display Network Ad Planner, retrieved on 27/10/2012

Almost all visitors are located in Italy, despite few exceptions from central Europe (Germany, France, UK, etc.) and very rare visitors from outside Europe (data available on http://whos.amung.us/stats/maps/gn93uouj8th4/).

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Table 12 provides evidence about Tuttoandrod.net visitors’ interests, showing that they are mostly attracted by Android Apps, Linux & Unix, Tablets and Open Source, as for all the other main Android blogs.

This suggests that usually those visitors are quite experts and are interested in having a broader knowledge of the whole open-source phenomenon.

Table 12 - Tuttoandroid.net audience interests Affinity16

Interest Android Apps

30.0x

Linux & Unix

25.3x

Tablet PCs

23.6x

Open Source

18.2x

Laptops & Notebooks

14.3x

Mobile Apps & Add-Ons

14.1x

Computer Components

13.0x

Operating Systems

11.2x

PDAs & Handhelds

11.0x

Communications Equipment

10.7x

Source: Google Display Network Ad Planner, retrieved on 27/10/2012

Despite those data, Mikhael Costa admitted that quite a big percentage of visitors, especially those following Tuttoandroid’s posts on Facebook, are newcomers in the Android ecosystem and are interested in very basic information and explanations. Many of them indeed ask for clarifications about complex words and look for guides about ways to improve and further personalize the original software provided by producers.

Tuttoandroid.net visitors usually visit other Italian blogs dealing with Android (nexuslab.com, tecnoandroid.it, etc.) or Android devices (samsung.hdblog.it). Interestingly, 16

Explanation of the affinity score from Google Support page: “the affinity score, which appears on a placement's profile page, shows the relationship between audiences of two sites. That is, the affinity score estimates how many times more likely you are to reach an audience who visits a specific placement versus an audience on the internet overall. For example, say you're reviewing the placement profile page for TropicalFishInfoCentral.com and in the 'Placements also visited' box, you see PetFishBlog.com, with an affinity score of 200.0x. This affinity score suggest that a TropicalFishInfoCentral.com visitor is 200 times more likely than the average internet user to be found on PetFishBlog.com”. (http://support.google.com/adplanner/bin/answer.py?hl=en&answer=140502)

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Table 13 reports also forum.xda-developers.com, which is the forum of the biggest community dealing with independent developments of Android, already mentioned in the previous chapter. It means that lots of Tuttoandroid.net readers are also interested in modifying the original software of their device, hinting quite a good level of knowledge of the Android platform.

Table 13 - Sites also visited by Tuttoandroid.net visitors Site

Affinity

nexus-lab.com

70.5x

tecnoandroid.it

61.8x

caotic.it

61.2x

samsung.hdblog.it

59.5x

android.hdblog.it

58.9x

androidgalaxys.net

54.9x

forum.hdblog.it

49.2x

hardware-programmi.com

47.8x

forum.xda-developers.com

45.5x

Source: Google Display Network Ad Planner, retrieved on 27/10/2012

These data seem to support what stated by Mikhael Costa about differences between iOS and Android’s customers. According to him, Android users usually love to personalize their device, from the very basic elements such as the ringtone or the wallpaper, to quite complex aspects such as the CPU clock speed. Additionally, great part of these settings can be modified directly in the original software provided by producers, and therefore they are really easy to be done. On the other hand iOS’ users prefer a more stable, fast and well-designed OS, even with some limitation for the user (Mikhael Costa, personal communication, 26/10/2012).

As a confirmation of the propensity to personalization of the Android users, some of the blog’s most read articles are those related to apps, wallpapers and ROMs downloads. In those articles, Android users get important news about releases and updates, but first of all they find direct links to files and guides.

However, the articles dealing with rumours and news about devices (mainly about Samsung) and about new Android versions have even more success. Indeed, a peak of 83

visits has been registered on May 3, 2012, when Samsung Galaxy S3 has been presented (Mikhael Costa, personal communication, 26/10/2012).

Articles about apps, instead, have very little number of readers immediately after they are posted, whereas they receive quite a big and constant number of visits during the following days and months (Mikhael Costa, personal communication, 26/10/2012).

Therefore it seems that users are primarily interested in news and gossips about new devices, and secondly look for information about how to personalize and improve their Android device.

Despite such a numerous readers’ base, Mikhael Costa affirmed that relations with smartphones’ producer are not always fruitful. Very often they do not care about blogs as they should, for instance providing devices for reviews. Relations are closer and more productive with smaller players, such as Huawei, LG and few others. To the contrary Samsung, strongly leading the market, seems to be more reluctant in supporting blogs’ activities. Of course, producers provide regularly press releases, but articles citing those companies’ official announcement do not catch at all the attention of Tuttoandroid visitors, who instead prefer impartial judgments about devices (Mikhael Costa, personal communication, 26/10/2012).

After that, when asked why people usually buy very few models (at the moment mostly iPhone and Samsung Galaxy S-series), Mikhael Costa stated that Apple and Samsung succeeded in producing very fetching devices, including some very interesting features able to catch customers’ attention, such as Siri or S-Voice. Not always those elements are very innovative, since they are not very useful or are common to many other devices (for instance in all Android devices is preinstalled the vocal assistant provided by Google). However, the correct and diffused communication of those features to the customers is essential in order obtain greater sales volumes from those innovations.

Furthermore those companies understood that customers are ready to pay a premium price in order to have the top (and most expensive) smartphone. Samsung recently managed to adopt a strategy very similar to Apple’s one, especially with Samsung Galaxy S3 and at the moment it seems that it is rapidly capitalizing on the huge investments in promotional activities (Mikhael Costa, personal communication, 26/10/2012).

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CHAPTER 4. Survey of customer preferences This research is aiming to discover what smartphone features are the most important for customers when buying or using a smartphone.

An inductive approach will be used for the scope, which means that the data collected on the field will help building a fact-based theory, whereas a deductive approach would require moving from theory to data (Saunders et al., 2007).

The inductive approach gives the possibility to develop a deeper understanding of the way in which humans interpret their social world and guarantees a more flexible structure of the research emphasis while the research is in progress (Saunders et al., 2007).

4.1 Method

4.1.1 Data collection

There were three main methods to collect primary data: (1) observation, (2) semistructured, in-depth and group interviews and (3) questionnaire (Saunders et al., 2007).

The first one seemed to be not suitable for the scope of the research, since it would not have provided any information about the customersâ&#x20AC;&#x2122; opinions.

Semi-structured,

in-depth

and

group

interviews

or

interviewer-administered

questionnaires would have probably been the most adequate methods, since they would have provided deeper explanation about customersâ&#x20AC;&#x2122; thoughts and judgements.

Unfortunately it would have required time and financial resources not available for this research.

Therefore primary data have been collected through a self-administered questionnaire, which guarantees an adequate data quality and low research cost in terms of time and money (Saunders et al., 2007).

Different kinds of questions have been used in order to respond to different needs of this research (category questions, ranking questions, rating questions, open qualitative questions).

85

In particular ranking questions have been used to discover elementsâ&#x20AC;&#x2122; relative importance to respondents. In addition, the number of elements to rank has been limited to six, since respondents can rank accurately only when they can see and remember all items, and usually think that ranking seven or more items requires too much effort (Saunders et al., 2007).

Languages available were English and Italian. A sample of the questionnaire is available in the Appendix. The questionnaire has been created and administered using the free online resource Qualtrics.

4.1.2 Sampling

A non-probability (or judgemental) self-selection sampling technique has been used, since it allows to easily collect large amount of data.

Quota sampling (based on the brand and of the OS of the smartphone owned) could have provided some useful data about preferences of customers using different platforms; however some important data about the diffusion of different OS and brands would have been lost.

Due to limited time and resources, it has not been possible to use quota sampling based on age or nationality.

The link to the questionnaire has been posted on Facebook, which guarantees the possibility to collect a large number of responses in very little time. Also, it allows reaching people in different part of the world. Unfortunately, a complete control over the sample was not possible, since the link to the questionnaire could have been forwarded to other people not originally included in the sample.

According to Saunders et al. (2007) â&#x20AC;&#x153;statistical analyses usually require a minimum sample size of 30â&#x20AC;? individuals, despite no real rules exist when using non-probability samples. However, usually a bigger number of responses guarantees more valid data, as is the case of this research, where 138 responses have been collected.

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4.1.3 Limitations

Limitations of the validity of the survey are mainly related to the sample size and selection method.

The number of respondents is quite small compared to the worldwide smartphone installed base, and the method used created a bias concerning the age and the nationality of respondents.

However, the brand and OS distribution resulting from the survey is very similar to the brand and OS distribution of the smartphones installed base worldwide, which means that results are likely to reflect with a good approximation customersâ&#x20AC;&#x2122; preferences and opinions.

4.2 Respondentsâ&#x20AC;&#x2122; demographic data

In total, 138 responses have been collected during the seven days in which the survey has been available. Of them, 97 people (70%) declared to own a smartphone. Only people owning a smartphone had to respond to the other questions in the survey.

Figure 39 - Percentage of respondents owning a smartphone

No 41 30%

Yes 97 70%

Source: elaboration from survey data

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Among respondents, there is almost an equal distribution between male (51%) and female (49%).

Also, the great majority of them has an age between 20 and 35 (90%) and has Italian (61%) or European nationality (except Italian, 31%).

Figure 40 - Gender distribution of survey respondents owning a smartphone

Female 49%

Male 51%

Source: elaboration from survey data

Figure 41 - Age distribution of survey respondents owning a smartphone 36- 55 1%

> 55 1% 16 - 20 8%

26 - 35 25%

21 - 25 65%

Source: elaboration from survey data

88

Figure 42 - Nationality distribution of survey respondents owning a smartphone South American 2%

Oceanian 1%

African 1%

North American 1%

Asian 3%

European (except Italian) 31%

Italian 61%

Source: elaboration from survey data

4.3 Survey results

Data about the smartphone owned by respondents are very similar to smartphone market shares worldwide. The great majority of people owns an Android device (60%) and the 28% owns an iPhone. In total, the 88% of people owns a smartphone run by one of the two most popular OS (iOS and Android).

Only few respondents bought a Symbian or a BlackBerry device.

Table 14 - OS distribution of smartphones owned by respondents Answer

Responses

%

Android

58

60%

iOS (Apple iPhone)

27

28%

Symbian

6

6%

BlackBerry OS

5

5%

Bada

1

1%

Windows Phone

0

0%

89

Tizen

0

0%

Windows Mobile

0

0%

Maemo

0

0%

LiMo

0

0%

MeeGo

0

0%

Palm/WebOS

0

0%

97

100%

Total Source: elaboration from survey data

Considering instead the smartphone brand, responses are quite concentrated around the two most popular brands: 42% of the smartphones owned by respondents are Samsung, and the 28% are Apple iPhones.

Table 15 - Brand distribution of smartphones owned by respondents Answer

Responses

%

Samsung

41

42%

Apple

27

28%

Sony Ericsson / Sony Mobile

6

6%

LG Electronics

6

6%

RIM (BlackBerry)

5

5%

HTC

4

4%

Nokia

4

4%

Motorola

2

2%

Onda

1

1%

Medion

1

1%

97

100%

Total Source: elaboration from survey data

Also, 90 out of 97 respondents indicated the model of the smartphone owned. There is evidence of a great concentration around very few models, mostly iPhones (25 in total), Samsung Galaxy S2 (11) and Samsung Galaxy Ace (7).

Except the Samsung Galaxy Ace, all the most common devices are premium smartphones, suggesting that the concentration around few models is higher for most expensive devices.

90

Figure 43 – Number of respondents owning the most common smartphones

Samsung Galaxy S2 Apple iPhone 4 Apple iPhone 4S Samsung Galaxy Ace Apple iPhone 3GS Samsung Corby Samsung Galaxy S plus Samsung Galaxy S 0

2

4

6

8

10

12

Source: elaboration from survey data

The 22% of respondents spent for the smartphone less than 200€ (21 smartphones divided into 19 Android, 1 Symbian and 1 Bada) and the 20% paid more than 400€.

Also, 18% of respondents bought the device through a contract with a phone operator.

Figure 44 - Distribution of price paid by respondents 25%

22% 18%

20% 15%

11%

10% 10% 5%

6%

13% 10% 5%

2%

2%

0%

Source: elaboration from survey data

91

The price paid distributions for iPhones and for Android devices are quite different (there is only a marginal overlap in the price ranges €300-€400 and €400-€500; it seems that these two OS are targeting very often different segments). Android devices bought by customers are cheaper and the 33% of them has been paid less than €200.

In addition, almost the 30% of iPhone owners declared to have bought it through a contract, whereas only the 12% of Android owners decided to sign a contract with a phone carrier.

Figure 45 - Distribution of price paid by respondents (Apple iOS owners) 35% 30% 25% 20% 15% 10% 5% 0%

Source: elaboration from survey data

Figure 46 - Distribution of price paid by respondents (Android owners) 35% 30% 25% 20% 15% 10% 5% 0%

Source: elaboration from survey data

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The following three figures show survey results about the importance of different elements when buying a smartphone. Respondents had to evaluate the importance of each of the following twelve elements in a scale from 0 (not important) to 6 (extremely important). The figures below represent the mean of respondentsâ&#x20AC;&#x2122; evaluations.

The standard deviation for all elements is comprised between 0.91 (Display) and 1.38 (NFC functionality), suggesting quite a good uniformity in respondentsâ&#x20AC;&#x2122; opinions.

According to respondents, the most important feature is the Operating System, which obtained an average evaluation of 4.91, followed by some technical features such as Display (4.90), 3G/LTE connectivity (4.89) and Processor (4.53). Very important is also the Price of the device (its average evaluation is 4.61).

Very low importance have the device Depreciation speed (2.66), the Image among people (2.93) and the NFC functionality (3.06), even if probably not all respondents actually knew what the NFC is, since it is a recently introduced feature.

RAM memory, Design, Brand and Camera quality are positioned in the middle positions of the ranking.

Figure 47 - Smartphones' most important elements according to smartphone owners Operating System Display 3G/LTE connectivity Price Processor RAM memory Design Producer (brand) Camera quality Near Field Communication (NFC) functionality Image among people Depreciation speed in second-hand market 0

1

Source: elaboration from survey data

93

2

3

4

5

6

Slightly different are the rankings obtained considering only iPhone owners or Android owners. The formers consider both 3G/LTE connectivity and Display more important than the Operating System, which is placed at the third position.

Also, iPhone owners consider very important the Design of the device, which is ranked fourth (it was seventh in the general ranking) and do not give too much importance to the Price, positioned eighth (it was fourth).

Figure 48 - Smartphones' most important elements according to Apple iPhone owners 3G/LTE connectivity Display Operating System Design Processor RAM memory Producer (brand) Price Camera quality Near Field Communication (NFC) functionality Depreciation speed in second-hand market Image among people 0

1

2

3

4

5

6

Source: elaboration from survey data

On the contrary, Android owners consider very important the Price, which is positioned second immediately after the Operating System. Also, the RAM Memory gained two positions compared to the general ranking, whereas 3G/LTE lost two positions.

Figure 49 - Smartphones' most important elements according to Android smartphones owners Operating System Price Display RAM memory 3G/LTE connectivity Processor Design Camera quality Producer (brand) Near Field Communication (NFC) functionality Image among people Depreciation speed in second-hand market 0

1

Source: elaboration from survey data

94

2

3

4

5

6

Table 16 - Smartphones' features rankings according to all smartphone, iOS and Android owners

All

iOS owners

Android owners

1 Operating System

3G/LTE connectivity

Operating System

2 Display 3 3G/LTE connectivity

Display Operating System

↓↓

4 Price 5 Processor

Design

↑↑↑

RAM memory

↑↑

Processor

꞊

3G/LTE connectivity

↓↓

↑↑ ꞊

꞊

Price

↑↑

Display

↓

6 RAM memory 7 Design

RAM memory

꞊

Processor

↓

Producer (brand)

↑

Design

꞊

8 Producer (brand)

Price

Camera quality

↑

9 Camera quality

Camera quality

꞊

Producer (brand)

↓

↓↓↓↓

10 NFC functionality 11 Image among people

NFC functionality

꞊

NFC functionality

꞊

Depreciation

↑

Image among people

꞊

12 Depreciation

Image among people

↓

Depreciation

꞊

Source: elaboration from survey data

In the following question respondents were asked to rank, according to importance, six different qualities of a smartphone OS. They were forced to select only one quality as the most important, one as the second one and so on.

Results are calculated considering the mean of the positions attributed by respondents.

The element with the smallest mean is the one ranked more often in the highest positions.

Results show that, according to respondents, the most important OS quality is the User friendliness, followed by Speed, Stability, Easiness of data sharing with computer and Apps availability. Very little importance is attributed instead to the Possibility to root or jailbreak the device.

It seems that Apps availability is not a discriminant in the OS choice, probably because nowadays all most important apps are available on all the main platforms.

If considering only the answers by iPhone owners, Speed is even more important than the User friendliness.

Table 17 - OS' characteristics rankings according to smartphones’ owners All

iOS owners

Android owners

Mean Standard Mean Standard Mean Standard Deviation Deviation Deviation 1 User friendliness

2,73

1,60

2,89

1,65

2,55

1,63

2 Speed

2,87

1,57

2,63

1,31

3,09

1,65

95

3 Stability

3,33

1,56

3,22

1,53

3,34

1,55

4 Easiness of data sharing with computer

3,72

1,54

3,33

1,62

3,95

1,41

5 Apps availability

3,76

1,38

4,04

1,51

3,60

1,32

6 Possibility to "jailbreak" or "root" the OS

4,59

1,89

4,89

1,72

4,47

2,00

Source: elaboration from survey data

The same method has been used in the following question, where respondents were asked to rank, according to importance, six relevant smartphone Brand peculiarities.

Product reliability ranked first, followed by Innovation and After-sale assistance.

IPhone owners considered particularly important the Innovation, whereas Android owner considered the Price as the second most important characteristic, immediately after the Product reliability.

For all kind of customers, it seems that the Producerâ&#x20AC;&#x2122;s nationality is not important, suggesting that in smartphone industry it does not exist any country of origin effect.

However, it is the element with the highest standard deviation, suggesting that there is quite a strong divergence among respondentsâ&#x20AC;&#x2122; opinions.

Table 18 - Brands' characteristics rankings according to smartphonesâ&#x20AC;&#x2122; owners All

iOS owners

Android owners

Mean

Standard Deviation

Mean

Standard Deviation

Mean

Standard Deviation

1

Product reliability

2.70

1.67

2.59

1.72

2.72

1.69

2

Innovation

3.11

1.61

2.89

1.91

3.40

1.43

3

After-sales assistance

3.38

1.35

3.33

1.36

3.41

1.35

4

Software updates

3.53

1.32

3.74

1.23

3.41

1.36

5

Price

3.53

1.54

3.81

1.27

3.31

1.67

6

Producer's nationality

4.75

1.99

4.63

1.96

4.74

2.05

Source: elaboration from survey data

In another question respondents were asked to evaluate different sources of information about smartphone which are useful before buying a new device. Respondents had to evaluate each of the eight sources, providing a vote between 1 (not important) and 6 (extremely important).

96

Reviews from specialized websites and blogs demonstrated to be the primary source of information to decide what smartphone to buy, with an average evaluation of 4.47, followed by friends’ suggestions (4.32).

Reviews on YouTube, Suggestions from shop assistants and the Producers’ official websites have rather little importance.

Results are very similar between iOS and Android owners.

Table 19 - Evaluation of different information sources when buying a smartphone

All Source

Android owners Mean

Source

iOS owners

Mean

Source

Mean

1

Reviews from specialized websites/blogs

4.47

Reviews from specialized websites/blogs

4.53

(↑) Friends' suggestions

4.30

2

Friends' suggestions

4.32

Friends' suggestions

4.29

(↓) Reviews from specialized websites/blogs

4.26

3

Retailers' discounts/advertising

3.96

Retailers' discounts/advertising

4.02

(↑) Producers' discounts/advertising

4.00

4

Producers' discounts/advertising

3.86

Producers' discounts/advertising

3.79

(↓) Retailers' discounts/advertising

3.85

5

Reviews from magazines

3.66

(↑) Producers' official websites

3.67

Reviews from magazines

3.70

6

Producers' official websites

3.63

(↓) Reviews from magazines

3.55

Producers' official websites

3.56

7

Suggestions from shop assistants

3.41

(↑) Reviews on YouTube

3.33

Suggestions from shop assistants

3.44

8

Reviews on YouTube

3.11

(↓) Suggestions from shop assistants

3.33

Reviews on YouTube

2.52

Source: elaboration from survey data

Also, very few people seem to be interested in jailbreaking or rooting their smartphones.

Indeed, only the 10% of respondents revealed to have a jailbroken or rooted device.

Actually, the 20% of respondents does not even know what jailbreak and root procedure are.

However, iPhone owners are more incline to jailbreak (15% did it), and almost all of them know what the jailbreak is (93%).

To the contrary, more than a quarter (26%) of the Android owners completely ignores the possibility to root the Android devices.

97

Table 20 - Percentage of jailbroken or rooted smartphones All

Apple iOS owners

Android owners

Yes

10%

15%

9%

No

70%

78%

66%

What's that?

20%

7%

26%

Source: elaboration from survey data

Almost all respondents are satisfied with their smartphone and would buy another device from the same producer.

The percentage of satisfied iPhone owners is 100%, and all of them would buy another iPhone.

Table 21 - Percentage of respondents satisfied with their smartphone Answer

%

Yes

96%

No

4%

Total

100%

Source: elaboration from survey data

Table 22 - Percentage of respondents that would buy again from the same producer Answer

%

Yes

97%

No

3%

Total

100%

Source: elaboration from survey data

In the last questions of the questionnaire, respondents were asked to designate the best Operating System and device, at the moment.

Concerning the OS, results demonstrated the existence of customersâ&#x20AC;&#x2122; communities around the two main OS in the market: Android and iOS. Indeed, the great majority (86%) of Android owners indicated Android as the best OS, whereas only 14% selected iOS. On the other hand, the 96% of iOS owners picked iOS as the best OS in the market.

98

Table 23 - Best OS according to smartphones' owners All

iOS owners

Android owners

1

Android

58%

4%

86%

2

iOS (Apple iPhone)

40%

96%

14%

3

BlackBerry OS

1%

-

-

4

Windows Mobile

1%

-

-

100%

100%

100%

Total Source: elaboration from survey data

Also, the opinions about the best device are almost entirely concentrated around the Apple iPhone 5 and the Samsung Galaxy S3, despite those devices are not technologically superior to the others in the list.

As a demonstration of the existence of a strong brand community around iPhone, the totality of the iPhone owners entitled the iPhone as the best device (all respondents except one selected the iPhone 5, one nominated the iPhone 4S).

To the contrary, not all Android owners indicated an Android device as the best one.

The 34% chose the iPhone 5 and the 3% selected the Nokia Lumia 920 (run by Windows Phone 8). Only the 48% indicated the Samsung Galaxy S3.

Table 24 - Best device according to smartphone owners #

Answer

%

iOS owners

Android owners

1

Apple iPhone 5

52%

96%

34%

2

Samsung Galaxy S3

33%

48%

4

Samsung Galaxy Note 2

5%

7%

8

Nokia Lumia 920

4%

3%

5

HTC One X Plus

4%

7%

9

Other

1%

3

Samsung Ativ S

0%

7

LG Optimus G

0%

6

LG Nexus 4

0%

Total

100%

4% (1 respondent, iPhone 4S)

100%

Source: elaboration from survey data

99

100%

In the following questions (optional) respondents were asked to indicate the reason of their device preference.

In total, 42 responses have been collected, corresponding to the 43% of all respondents.

18 of the 27 iPhone owners (67%) responded to the question, while only the 38% of the Android owners did it.

Also, among the 42 responses, 29 (69%) came from people selecting iPhone 5 as the best device, although the iPhone 5 obtained only the 52% of the preferences in the previous question. Therefore, there is evidence of a much deeper participation by iPhone fans.

Some interesting responses by people selecting iPhone 5 as best device are:

17

•

“to continue with the same, well-established operating system”

•

“design, quality, reliability, software updates, speed”17

•

“iOS, ease of use, customer service, apps quality”

•

“I use many Apple products and I am comfortable with it”

•

“Apple addicted” 17

•

“iPhone is iPhone” 17

•

“fashion influence, people use it, so i think it should be good enough; also advertisements, brand image impact”

•

“because I am used to the operating system as iPhone is the only smart phone I've ever had”.

Translated from Italian

100

4.4 Findings

Customers’ choices are mostly driven by the Operating System, by some technological features (display, the 3G/LTE connectivity and processor above all) and by the price.

Customers judge very important the user-friendliness and the speed of the OS, whereas they do not care too much about the possibility to jailbreak or to root it.

Furthermore, they look for a reliable device, full of innovations, whatever the producer’s nationality is.

When buying a smartphone, specialized websites/blogs and friends’ suggestions are the main information sources.

Also, customers’ choices are concentrated around two main OS (Android and iOS) and two main brands (Samsung and Apple).

Customers buying Android devices give much more importance to the price, whereas those buying iPhones care more about design.

Additionally, iPhone owners seem to be very enthusiastic about their device and usually promote iPhone among other people. Apple brand community seems to be much more active than those created around Android or Samsung.

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CHAPTER 5. Case study: LG Electronics – Mobile Communications

This case study is going to investigate the product development strategies adopted by LG Electronics, Mobile Communications business unit. Despite being at the moment the world fifth largest mobile phones18 producer, the company is still struggling to gain market shares in the smartphones market.

In particular, this paragraph will be focused on the Italian Mobile Communications business unit, sure that results could be generalized to a lot of other subsidiaries worldwide, especially those in more developed countries and in more mature markets.

Indeed, strategies are set by LG Electronics Head Quarter in Seoul and differ slightly among continents (for instance LG Mobile devices are almost the same in North America, Europe and Eastern Asia), and even less among countries in the same continent.

The following paragraphs have been written with the very essential help provided by Mr Raffaele Cinquegrana19. Many other information have been obtained during my working experience in the company, where I have been spending six months as intern from March to September 2012.

5.1 LG history

The LG Corp. has been founded in 1947 by Koo In-Hwoi as Lak-Hui (pronounced “Lucky”) Chemical Industrial Corp.

Despite being a company specialized in chemical products (producing mainly cosmetics), it started almost immediately expanding its business in plastics production.

The company in 1952 began manufacturing the first plastic daily necessities in Korea, in 1954 developed the Lak-Hui dental cream, the first cream-type toothpaste in Korea and in 1956 produced the first PVC pipe in Korea.

However, a drastic change happened in the spring of 1957, when a new idea came to the mind of Lak-Hui founder (LG Electronics, 2008): 18

The category “mobile phones” includes both “smartphones” and “feature phones” Mr Raffaele Cinquegrana is the Product Manager of the Mobile Communications division in LG Electronics Italia S.p.A. since February 2001 19

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«…Koo In-Hwoi, the founder and chairman of the company (president of Lak Hui at the time) and other employees, managers and executives gathered in a small office at the company: “These days, I spend my nights listening to the radio” Yoon WookHyun planning director opened the conversation. At the time, radios were attracting interests as embodiments of civilization, bringing news of the world to their listeners. The instant he heard Yoon Wook-Hyun's opinion, the possibility of a new business opportunity came into Koo In-Hwoi's mind: “We could make it”».

A bit more than one year later, on October 1st 1958, the company Goldstar (now LG Electronics) was founded, and “sowed seeds of electronic industry to the land where traces of the recent war still lingered” (LG Electronics, 2008).

Since the very beginning of its life, LG Electronics (then Goldstar) was characterized by a great part of components built inside the company, to the point that the first radio model, released in November 15th 1959, contained more than 60% of domestic components.

The company grew rapidly and presented in 1961 Korea’s first automatic telephone (GS-1), in 1965 Korea’s first refrigerator (GR-120), in 1966 Korea’s first monochrome TV (VD-191), in 1968 Korea’s first air-conditioner (GA-111), in 1969 Korea’s first washing machine (WP-181), demonstrating how innovation-oriented was the company since the very beginning of its life.

Goldstar continued its fast and uninterrupted growth for decades, exporting more and more products (in 1978 it was the first Korean home appliances company surpassing 100 million dollar exportation) and building bigger and bigger plants all over the country (and abroad). The company indeed became a global company when in 1982 it inaugurated in Huntsville (USA) the first-ever Korean foreign production site.

In the meanwhile also Lak-Hui (Lucky) continued its incredibly fast growth and only in 1995 the two companies Lucky and Goldstar merged in what we know as LG Corp. and Lucky was renamed in LG Chemicals while Goldstar became LG Electronics.

LG Electronics Italia S.p.A. has been founded one year later, on the January 10th 1996.

Today LG Electronics is one of world biggest multinational companies in the electronics industry and competes to “become the market leading company with broad

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market recognition”20. Despite the economic crisis of the last five years, the company is still protagonist in every country and every market it operates.

Figure 50 – LG Electronics Management philosophy, Conduct and Vision

Source: LG Electronics website. management, retrieved on 02/09/2012

From

http://www.lg.com/global/about-lg/corporate-information/jeong-do-

5.2 The group structure

LG Electronics is today part of the huge LG Corp. Holding which is, with Hyundai and Samsung, one of the biggest South Korean chaebol21.

LG Electronics Italia S.p.A. is one of the 98 LG Electronics subsidiaries distributed worldwide. The company includes also 19 Liaison Offices and 6 Design Centres.

Mobile Communications (MC) is today only one of the five LG Electronics Italia S.p.A. business units. The other four are Home Entertainment (HE), Home Appliances (HA), Air Conditioning (AC) and Business Solutions (BS).

From a legal and financial point of view, the group structure is a lot more complex: for instance LG Electronics Italia S.p.A. is fully owned by LG Electronics European Holding B.V. 20

LG Electronics’ vision The chaebol, as reported in the Merriam-Webster dictionary, is “a family-controlled industrial conglomerate in South Korea” and derives from Korean chaebŏl, from chae (wealth, property) + pŏl (faction, clan).

21

105

However, the precise description of the relations inside the group lies outside the general purpose of this work and actually the structure is even more complicated if considering the group from an operational point of view, since the relations inside it are very articulated.

Table 25 - Companies in LG Group divided by sector of activity ELECTRONICS

CHEMICALS

TELECOMMUNICATIONS AND SERVICES

LG Electronics

LG Chem

LG U+

LG Display

SEETEC

CS Leader

LG Innotek

LG Household & Health Care

AIN Teleservice

Hiplaza

LG Life Sciences

DACOM Crossing

Hi Logistics

Medialog

LG Siltron

LG CNS

Lusem

LG N-Sys BIZTECH & EKTIMO CO. LTD. Ucess Partners Co., Ltd. SERVEONE G2R L. Best LG

Management

Development

Institute:

Economic

Research Institute LG Sports Source: LG Corp. website, http://www.lgcorp.com/companies/company.dev, retrieved on 02/09/2012

Figure 51 â&#x20AC;&#x201C; Italian Mobile Communication business unit position

LG Corp.

LG Electronics LG Electronics Italia Mobile Communications Business Unit Source: elaboration from data acquired on LG Corp. website

Every single Mobile Communications business unit has a very strong relation with the Mobile Communications business unit in the Korean head quarter in Seoul and it is strongly dependent from its decisions.

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The production and R&D activities are almost entirely concentrated in South Korea and India. There is quite low participation in the innovation process from subsidiaries, which then decide whether to sell or not a particular product, of course in agreement with managers in head quarter. Only few activities are decentralized to a sort of European head quarter, which is anyway strongly dependent from decisions coming from Seoul.

Also the top management of the subsidiaries worldwide is almost entirely South Korean: only few managers have local origins, mainly those in charge of Sales and Marketing activities.

5.3 Economic and financial situation

The Mobile Communication business unit in the last few years registered a slight decrease of the revenues, paired with a drastic reduction of the company profitability.

Indeed LG had to invest lots of resources in R&D in order to accelerate the transition from feature phones to smartphones.

Also, the company increased its marketing expenditures with the purpose of improving the brand image and gaining market shares in more developed countries (LG Electronics, 3Q 2012 Earnings Release).

Nonetheless, it seems that recently the company inverted the negative trend and in the 3rd quarter of 2012 it recorded an operating profit of KRW 22 billion (USD 19.42 million) due mostly to healthy sales of LTE smartphones in Korea, Japan and the United States.

Additionally, the Optimus L-Series continued to expand into 3G markets, contributing to the sales growth. Revenues reached KRW 2.45 trillion (USD 2.16 billion) and shipments increased by 9% from previous quarter, exceeding 14 million units (LG Electronics, 2012a). The figures below show data of the last three years.

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Figure 52 - LG Mobile Communications (global) sales (trillion KRW; 1 million KRW ≈ 706 EUR) 4 3,5 3 2,5 2 1,5 1 0,5 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 Source: elaboration from company’s official quarterly Earnings Releases

Figure 53 - LG Mobile Communications (global) operating margin (%) 4,0% 2,0% 0,0% -2,0%

1Q 2010

2Q 2010

3Q 2010

4Q 2010

1Q 2011

2Q 2011

3Q 2011

4Q 2011

1Q 2012

2Q 2012

3Q 2012

-4,0% -6,0% -8,0% -10,0% -12,0% Source: elaboration from company’s official quarterly Earnings Releases

Data from the LG Electronics Italia S.p.A. annual reports reveal that from a local perspective the company’s revenue dramatically decreased in 2011, when the company registered a 24 million euro annual loss.

Such a big sales decrease has been caused by the economic and financial crisis in the Euro-zone, but even more by wrong strategies adopted in the previous year. Indeed, positive data about 2010 have been obtained only thanks to massive sales of entry-level products at much discounted price. As a consequence, retailers in 2011 had still huge stocks of unsold old products and were very reluctant to buy the new 2011 products.

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The company started therefore a deep revolution in strategies and internal structures, aiming at being again profitable from 2012. This led also to a drastic reduction of the number of employees (not shown in Figure 56).

Figure 54 - LG Electronics Italia S.p.A. (all business units) revenues (EUR) 1.400.000.000 1.200.000.000 1.000.000.000 800.000.000 600.000.000 400.000.000 200.000.000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: elaboration from companyâ&#x20AC;&#x2122;s official Annual Reports

Figure 55 - LG Electronics Italia S.p.A. (all business units) EBITDA and profit (loss) (EUR) 30.000.000 20.000.000 10.000.000 0 2001

2002

2003

2004

2005

-10.000.000 -20.000.000 -30.000.000

EBITDA Profit (loss)

Source: elaboration from companyâ&#x20AC;&#x2122;s official Annual Reports

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2006

2007

2008

2009

2010

2011

Figure 56 - LG Electronics Italia S.p.A. (all business units) employees' number 350 300 250 200 150 100 50 0 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: elaboration from companyâ&#x20AC;&#x2122;s official Annual Reports

5.4 LG Mobile position in world and Italian market

On May 2012 LG Electronics was the fifth largest mobile phones vendor with a 3,4% market share, as in the table below (IDC, 2012).

Despite LG Electronics is one the world leaders in mobile phones industry, the situation is quite different if considering only the smartphones sales. LG Electronics is indeed not even in the top five vendors and it is still struggling to acquire a precise identity in the market.

Table 26 - Top Five Worldwide Total Mobile Phone Vendors, Shipments, and Market Share, Q1 2012 (Units in Millions) Vendor 1Q12 Unit 1Q12 1Q11 Unit 1Q11 Year-over-year Shipments Market Shipments Market Change Share Share 93.8 23.5% 69.3 17.1% 35.4% Samsung Nokia

82.7

20.8%

108.5

26.8%

-23.8%

Apple

35.1

8.8%

18.6

4.6%

88.4%

ZTE

19.1

4.8%

15.0

3.7%

27.0%

LG Electronics

13.7

3.4%

24.5

6.1%

-44.1%

110

Others Total

154

38.7%

168.4

41.7%

-8.6%

398.4

100.0%

404.3

100.0%

-1.5%

Source: IDC Worldwide Mobile Phone Tracker, May 1, 2012 Notes: Vendor shipments are branded shipments, and exclude OEM sales for all vendors. Unbranded phones, also referred to as "white phones", previously not counted by IDC, are included under “Others” in 1Q12 and 1Q11 total mobile phone shipments.

Table 27 - Top Five Worldwide Smartphone Vendors, Shipments, and Market Share, Q1 2012 (Units in Millions) Vendor 1Q12 Unit 1Q12 1Q11 Unit 1Q11 Year-overShipments

Market

Shipments

Market

Share

year Change

Share

Samsung

42.2

29.1%

11.5

11.3%

267.0%

Apple

35.1

24.2%

18.6

18.3%

88.7%

Nokia

11.9

8.2%

24.2

23.8%

-50.8%

Research In Motion

9.7

6.7%

13.8

13.6%

-29.7%

HTC

6.9

4.8%

9.0

8.9%

-23.3%

39.1

27.0%

24.5

24.1%

59.6%

144.9

100.0%

101.7

100.0%

42.5%

Others Total

Source: IDC Worldwide Mobile Phone Tracker, May 1, 2012 Note: Vendor shipments are branded shipments and exclude OEM sales for all vendors.

Ahonen (2012c) ranks LG Electronics as 9th vendor with a 4.2% market share. He affirmed that: “LG is still well behind the rivals in migrating its handset unit from dumbphones to smartphones (only a third LG branded phones sold is smartphones currently). But as LG has returned to profit-making, now the company is healthy once again, and can pursue now better growth and success in this industry”.

Table 28 - Top ten smartphone vendors worldwide. Shipments and Market Share, Q2 and Q1 2012 Rank

Maker

Units Q2 2012

Units Q1

Market

Market Share

(millions)

2012

Share

Q1 2012 (%)

(millions)

Q2 2012 (%)

1

Samsung

50.4

44.5

32.9

30.6

2

Apple

26.0

35.1

17.0

24.2

3

Nokia

10.2

11.9

6.7

8.2

4

HTC

8.8

7.9

5.8

5.4

5

ZTE

8.0

5.0

5.2

3.4

6

RIM

7.8

11.1

5.1

7.6

111

7

Sony

7.5

7.3

4.9

5.0

8

Huawei

7.0

7.0

4.6

4.8

9

LG Electronics

(↑) 6.5

5.5

(↑) 4.2

3.8

10

Motorola

6.0

5.1

3.9

3.5

7.3

3.3

Others

10.8

4.8

TOT.

153.0

145.2

Source: Elaboration from Tomi Ahonen Consulting Estimates Aug 15 and May 16, 2012.

From vendor data and other sources.

In Italy the situation for LG Mobile pretty much mirrors the market shares in the worldwide market. Therefore, also in Italy LG Electronics is among the biggest players in the smartphone industry.

Table 29 – Top 8 Smartphone vendors’ Market Share in Italy and worldwide (Q1 2012) Rank

Maker

Market Share Italy

Market Share worldwide

Q1 2012 (% units)

Q1 2012 (% units)

1

Samsung

34.3

30.6

2

Nokia

20.8

8.2

3

Apple

20.0

24.2

4

RIM

5.3

7.6

5

LG Electronics

4.0

3.8

6

HTC

3.5

5.4

7

Sony

3.4

5.0

8

Huawei

2.5

4.8

6.2

10.4

Others

Source: elaboration from MarketPlace n.9/2012 p.53 (GfK data) and from Tomi Ahonen Consulting Estimates May 16, 2012 from vendor data and other sources

5.5 LG Mobile (Italy) strategy

At the moment, the LG Mobile core business is the production of Android smartphones.

Despite this, the company still sells a number of low-cost feature phones, especially in developing countries. These feature phones usually cost less than €100, some of them have touch-screens and very often permit to use two or three SIM cards at the same time.

The company also released some smartphones run by operating systems different from Android, such as the LG Optimus 7 (E900) run by Windows Phone.

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Though, the great majority of devices produced are Android smartphones.

The company worldwide is also pushing into the market several LTE (Long Term Evolution) devices, with the target of acquiring market shares in most developed countries. LG detains in fact the 23% of the LTE key patents (Savitz, 2012) and is willing to capitalize on that.

However, in Italy and in several other developed countries the LTE networks are still not ready and therefore LG cannot sell its LTE devices, losing great part of its technology advantage.

The peculiarities common to (almost) all new LG Android devices are: •

big displays with realistic colours22;

•

fetching design;

•

innovative technologies;

•

competitive prices, decreasing over the time.

Recently the company launched the L-Style series, composed by the LG Optimus L3, L5, L7 and L9. All these devices have very big displays (compared to other devices in the same segment), affordable price (from €129 for the L3 to €299 for the L9), and a squared fetching design.

Also, the company presented in July 2012 one of the first smartphones mounting a quad-core processor, the LG Optimus 4X HD. In Italy, it has been originally priced €499, which is a very convenient price compared to the €699 customers have to pay for the Samsung Galaxy S3 and the HTC One X, which are very similar devices.

However, the company still struggles to communicate to customers the deep innovations created in last two years: for instance LG launched in 2011 the first smartphone with a 3D technology (LG Optimus 3D P920), followed this year by its successor LG Optimus 3D Max P720; none of them obtained a satisfactory success in the market.

22

LG uses LCD displays, whereas other competitors prefer Amoled ones. Although both technologies have pros and cons, LCD displays guarantee more realistic colours.

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Additionally, the company still lacks in Customer Relationship Management and its brand is not as valuable as competitors’ ones.

5.6 Android adoption process in LG Mobile (Italy)

Although LG Mobile was one of the founding members of the Open Handset Alliance, it decided to adopt Android quite late.

Initially, after the first Android device was released in 2008, the company decided to keep producing and selling its feature phones and very few models run by Symbian or Windows Mobile (KS10, KS20 and KT610). At that time Symbian was still the most used platform and Nokia was earning good profits from its sales.

However, in 2009 Android acquired very fast market shares; the OS was continuously improved and more and more producers were adopting it.

When at the end of the year LG Electronics took finally the right decision and entered in the smartphone industry with few Android devices, its main competitors had already quite a consolidated experience in smartphones design and production.

The first LG Android device (LG LinkMe, GW620) was indeed a failure, mainly because it was equipped with an old Android version (Android 1.6 Donut) and with a resistive touchscreen (a lot less user-friendly compared to capacitive ones). LG smartphones were still not able to match the customers’ expectations and were definitely inferior to competitors’ ones.

In the following months the company rapidly increased its R&D investments and quite a good success came almost at the end of 2010, when LG released three new Android devices, targeting customers looking for affordable Android smartphones. They were the LG Optimus GT (GT540), the LG Optimus Chic (E720) and the LG Optimus One (P500), which is still the most sold LG smartphone in Italy.

Despite reasonable prices, they were quite technologically advanced. The Optimus One was indeed the first smartphone ever equipped with Android 2.2 (Froyo) and including a 512MB RAM memory, and it was priced €229, while all other competitors were mainly producing smartphones for higher market segments.

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The table below shows all the LG Android smartphones launched in Italy, demonstrating that the company only recently entered in the premium segment.

However, the bulk of the company’s sales still comes from smartphones priced from €100 to €300.

Table 30 - LG Android smartphones released in Italy and prices at launch Price suggested at launch

Year

€ 0-100

2009-10

2011

2012

-

-

-

P350 (€149)

C550 (€179)

E400 (€129)

GT540 (€199)

C660 (€179)

E610 (€199)

€ 101-200

P690 (€199) E510 (€199) P500 (€229)

€ 201-300

E730 (€299)

GW620 (€299)

P700 (€299) P760 (€299)

E720 (€299) € 301-400

P970 (€399)

€ 401-500

P990 (€499)

P880 (€499) P720 (€499) P895 (€499)

P920 (€599)

€ 501-600

P940 (€599)

Source: elaboration from company’s data

Mr Cinquegrana (personal communication, 30/08/2012) confirmed that in the near future LG will continue using the Android platform. However, he pointed out that the company has always eyes open to whatever happens in the smartphone industry and it is open to every solution, even though at the moment the only LG smartphone sold in Italy with a different OS is the LG Optimus 7 E700, run by Windows Phone 7.5.

5.6.1 Advantages in using Android

From the company perspective, the main advantage in creating and selling Android smartphones is the possibility to have an OS completely flexible and adaptable to whatever device the company needs to produce. While Windows Phone few years ago 115

was limited to the most expensive smartphones, Android gave the possibility to LG to create more affordable smartphones (R. Cinquegrana, personal communication, 30/08/2012). Furthermore, since Android is an open source OS, the company does not have to pay any royalty fee, giving the possibility to go to the market with cheaper devices.

Additionally, the company has the possibility to buy the hardware components from countless suppliers, since every company adopted the Android standards.

It is therefore demonstrated that also smartphone producers benefit from the network externalities developed around Android, explaining why most companies operating in the smartphone industry decided to participate in the Open Handset Alliance, which is the organ developing Android, led by Google.

Another element which is both an issue and an opportunity for Android smartphones producers is represented by the almost perfect compatibility among Android smartphone from different producers. It makes very easy for customer to shift, for instance, from a Samsung to an LG Android device (and vice versa) without losing any data. This explains why smartphonesâ&#x20AC;&#x2122; producers try to obtain customersâ&#x20AC;&#x2122; loyalty introducing in their software some fully-owned non-transferable services.

The discussion with Mr Cinquegrana was particularly useful also to discover some of the main advantages provided by Android, this time from the customer point of view.

First of all, Android gives the possibility to download almost all the apps in the Google Play Store (previously called Android Market) in all Android devices, from the cheapest to the most expensive one. The Play Store is accessible from all Android devices and contains (almost) always the same apps.

Furthermore customers and producers can benefit from the great support provided by the huge community of independent developer who distribute for free unofficial ROMs23.

23

As reported already in the previous chapters, these ROMs are unofficial Android version of the OS. It is possible to develop such ROMs because the Android source code is open-source and therefore available to everyone). Some very famous ones are Cyanogenmod and MIUI.

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5.6.2 Disadvantages in using Android

The biggest side effect experienced adopting Android is the necessity to provide constant updates to the customers. In fact, Google releases continuously new Android versions, and all the smartphone producers have to continuously catch up in order to avoid customers’ complaints (R. Cinquegrana, personal communication, 30/08/2012).

This is indeed the biggest issue affecting (seriously) LG sales in the highest market segments.

People spending quite a lot of money for a smartphone pretend to receive continuous software updates from the producer; Apple provides very quick updates also to previous iPhone models, and some other competitors (Samsung above all) are getting quicker and quicker in providing Android updates.

Problems for the company started at the end of 2011, when the LG P990 experienced delays in the update to Gingerbread (Android 2.3). It is a premium smartphone launched in March of 2011 at €499, detaining even a Guinness World Record as the first dualcore smartphone. The company originally announced it would have released the update

by June 2011 and in September 2011 announced a further delay (Costa, 2011). The software was eventually updated in November, together with the Gingerbread update of another premium smartphone, LG P920 Optimus 3D (world’s first 3D smartphone), delayed as well.

Few weeks later, on December 26th 2012, the company officially announced the schedule for updates to the new Android version, Ice Cream Sandwich, stating that LG P990 would have been updated by June of 2012 and P920 in the third quarter of the year. At the moment (end of October 2012), the company still did not release the promised updates and in the meanwhile other two Android versions have been released (4.1 and 4.2 Jelly Bean), and almost all competitors already updated their top devices to Ice Cream Sandwich or to Jelly Bean.

At the moment, the relation with buyers of these premium smartphones is fatally compromised, to the point that in summer months approximately 95% of the people’s comments on the LG Italia Life’s Good Facebook page were dealing with operating system updates, and most of them were complaints due to the delays and the absence of official communications from the company (data obtained through LG Italia Life’s Good Facebook page analysis).

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Recently Tuttoandroid.net realized a survey in order to estimate what percentage of customers would buy the new Google Nexus smartphone, produced by LG, the LG Nexus 4. The 24% of the voters affirmed that it would not buy that smartphone just because it is produced by LG Electronics.

Table 31 - Customers buying intentions about LG Nexus 4 (1181 votes in total) Would you buy the new LG Nexus 4?

I do not know. I will wait and see it after presentation

35%

Yes. Because it is Google Experience and LG will not work on the software

28%

No. Because it is produced by LG

24%

No. Because I will buy the Samsung Galaxy Nexus

9%

No. I will buy another smartphone

4%

No. I do not like the Google Experience

0%

Source: translated from tuttoandroid.net, Iovene (2012), retrieved on 29/10/2012, before the Nexus 4 presentation

The need to provide software updates costs definitely a lot of money to all Android devices producer, because they have to adapt every Google Android software version to devices launched even one year before and whose development is totally stopped. Of course, this requires a lot of resources (in terms of software developers) and distracts companies from creating innovation in new smartphones (R. Cinquegrana, personal communication, 30/08/2012).

But also for customers Android has quite relevant side-effects, such as the perceived low security of the OS and the delays in updates from the smartphone producer. For developers, finally, it is causing worries the wide software piracy surrounding the Android OS (R. Cinquegrana, personal communication, 30/08/2012).

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Conclusion This paper demonstrated that only the proper combination of Operating System, device technology and community support guarantees a sales success in the smartphone industry.

At the moment, Apple is the company combining better those three elements, obtaining more than the 70% of the profits of the whole smartphone industry. Also, iPhone owners are always enthusiastic about their device and usually promote iPhone among other people: Apple brand community looks to be much more active than those created around competitorsâ&#x20AC;&#x2122; products.

Community (including blogs, apps, ROM developers and brand communities) is indeed a very important element affecting smartphone sales. First of all, the apps created by software developers represent one of the main drivers for smartphone adoption.

Secondly, specialized websites/blogs and friendsâ&#x20AC;&#x2122; suggestions are the main information sources when it comes to buy a new smartphone.

To the contrary, only few customers are interested in ROMs and software modifications created by independent software developers, who therefore have only a limited impact on sales.

Concerning the OS, Android and iOS are now powerfully leading the market, thanks also to a perfect exploitation of the positive network externalities and the right timing of the entrance into the market.

Finally, the LG case study confirmed that the correct choice of the OS is essential in order to guarantee adequate revenues from smartphonesâ&#x20AC;&#x2122; sales. Although LG is not a leader in the industry, choosing Android it had the possibility to gain quite good market shares, and at the moment LG smartphone sales are almost equal to the total Windows Phones sales.

However, as it has been demonstrated in the case, the choice of the right OS is not enough. LG still needs to improve relations with customers and to provide more quickly the updates for its top-smartphones.

Also, innovation is essential to guarantee smartphones sales in the future. LG managed to build a slight competitive advantage from the R&D activities related to LTE devices and it is already capitalizing on that, selling more and more smartphones in those markets were LTE networks are already available.

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Appendix Survey 1) Do you have a Smartphone?

A Smartphone is a device which has the type of operating system for which users can install applications.

Select Yes if your mobile phone has an operating system in the following list: Android - Bada BlackBerry - iOS (Apple iPhone) - Symbian - Windows Mobile - Windows Phone - Maemo/MeeGo Palm/WebOS - Tizen â&#x20AC;&#x201C; LiMO. Yes No

2) What's your Smartphone Operating System?

Android Bada BlackBerry OS iOS (Apple iPhone) LiMo Maemo MeeGo Symbian Palm/WebOS Windows Mobile Windows Phone Tizen

3) What is your smartphone BRAND? Samsung Apple Nokia HTC ZTE RIM (BlackBerry) Sony Ericsson / Sony Mobile Huawei LG Electronics Motorola Asus Sharp Acer Alcatel NGM Others

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4) What is the name of the model?

5) How much did you pay for it? 1 EURO = 1,30 USD - 0,80 GBP - 1,30 AUD (approximately) I don't know I bought it with a contract I don't know the price in Euro €50 - €100 €100 - €200 €200 - €300 €300 - €400 €400 - €500 €500 - €600 > €600

6) When buying a Smartphone, how would you evaluate the following elements?

Not at all Important

Very Unimportant

Somewhat Unimportant

Camera quality Depreciation speed in second-hand market Design Display Image among people Near Field Communication (NFC) functionality Operating System Price Processor Producer (brand) RAM memory 3G/LTE connectivity

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Somewhat Important

Very Important

Extremely Important

7) Rank these OPERATING SYSTEMS' qualities from the most important (1) to the least one (6). ______ User friendliness ______ Stability ______ Apps availability ______ Possibility to "jailbreak" or "root" the Operating System ______ Speed ______ Easiness of data sharing with computer

8) Rank these elements influencing the PRODUCER (BRAND) CHOICE from the most important (1) to the least one (6). ______ Innovation ______ After-sales assistance ______ Product reliability ______ Software updates ______ Price ______ Producer's nationality

9) When deciding what Smartphone to buy, how do you evaluate the following sources of information?

Not at all Important

Very Unimportant

Somewhat Unimportant

Reviews on Youtube Producers' official websites Reviews from specialized websites/blogs Reviews from magazines Friends' suggestions Suggestions from shop assistants Retailers' discounts/advertising Producers' discounts/advertising

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Somewhat Important

Very Important

Extremely Important

10) Did you modify the original software of your Smartphone?

Select Yes if your iPhone is JAILBROKEN or your Android, Windows Phone or Symbian is ROOTED. Further information here: http://www.androidpit.com/jailbreak-android Yes No What's that?

11) Considering the price you paid and the device performances are you satisfied with your Smartphone?

Yes No

12) Would you buy/recommend another Smartphone from the same producer?

Yes No

13) What do you think is the best Operating System for Smartphone?

Android Bada BlackBerry OS iOS (Apple iPhone) LiMo Maemo MeeGo Symbian Palm/WebOS Windows Mobile Windows Phone Tizen

14) Imagine you have an unlimited budget to buy a new Smartphone, what would you buy?

Apple iPhone 5 Samsung Galaxy S3 Samsung Ativ S Samsung Galaxy Note 2 HTC One X Plus LG Nexus 4 LG Optimus G Nokia Lumia 920 Other ____________________

15) Why? (Optional)

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16) Age < 10 11 - 15 16 - 20 21 - 25 26 - 35 36- 55 > 55

17) Gender Male Female

18) Nationality Italian European (except Italian) North American South American Asian African Oceanian

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