Manufacturers of lightbulbs, cars, and smart devices of all sorts face a tough choice. Neither option is very appealing.
Option 1: Build your own operating system for your smart devices, launch your own app store and developer network, and attempt to grow an ecosystem from scratch.
Option 2: Drink the Kool-Aid, bite the bullet, walk the plank. Accept Google Android or Apple iOS, become a part of their feudal society, join their massive developer networks, and commit your fate to the ecosystem.
Many hardware companies have attempted Option 1, but nearly all of them fail. Software is hard for hardware companies. It’s very difficult to develop and launch and grow an operating system.
When I worked as head of digital media for Sony Pictures Entertainment in the late 1990s, I was surprised to learn that a team in one of Sony’s legendary Shinagawa research laboratories under the esteemed Mario Tokoro was developing an operating system called Aperios. It was an incredibly ambitious project: an object-oriented reduced instruction set computing (RISC) architecture that would improve performance in smart devices. But for all its virtues, Aperios failed to catch on: it was only installed on a single TV set-top box and in the artificial intelligence AIBO robot pet. Not one of Sony’s hardware divisions used it. Not the TV group nor the PlayStation group, not the mobile phone unit nor the handheld game group. Not even the personal computer group. They chose instead to live under the hegemony of Microsoft Windows instead of taking the risk of launching a new ecosystem from
scratch. Worse, distracted by this aspect of software development, Sony missed the rise of MP3
entirely, leaving the portable music field that it created with the Walkman wide open to Apple’s iPod.
The disastrous experience in 2014 of IoT companies—releasing buggy, insecure, barely functioning software—illustrates the peril of attempting to “roll your own” operating system,
especially if it is proprietary. A closed system is often fouled by a lethal stew of malicious attacks, mischief, incompetence, and greed. Although a company may eventually patch the security holes, seal up the vulnerabilities, and make the software more reliable, it won’t solve the interoperability
problem singlehandedly. As we already know from the smartphone war that crushed Nokia, devices with small app marketplaces and fledgling developer ecosystems tend to get steamrollered by devices with larger ecosystems.
Option 2 is no picnic, either. Once a company accepts Apple’s or Google’s operating system, it loses control of the customer experience and tends to become just another generic device maker.
Apple and Google offer two different flavors of the same bad choice.
Doing business with Apple is tough because you give up a lot of control over your destiny. Apple’s strategy is to commoditize complementary products in the iOS ecosystem. Recall that profit margins on content and apps were crushed in the App Dictatorship in order to drive up the value of Apple
hardware, especially the iPhone. Something similar is at work in IoT. For makers of smart devices, partnering with Apple means subjecting their products to the ever-expanding iOS ecosystem. They gain access to the world’s richest and biggest ecosystem of developers and legions of fanatical Apple loyalists, but by relying on an iPhone app to serve as the remote control for their products, they give up the ability to define their own branded user experience. Ultimately, such products are destined to become faceless appliances subordinate to an Apple device.
Google commoditized its own operating system (OS) in order to thwart Microsoft and other competing OS providers such as Palm and Research In Motion. By making Android free, open, and ubiquitous, Google destroyed the value in the operating system as a business. That’s a boon to
manufacturers whose biggest item on the bill of goods was formerly the license fee paid to Microsoft.
But it comes with a catch. While Google gives the OS away free to manufacturers, they are obliged to install Google apps and set Google as the default search engine, and place the Google Play Store and search icons prominently on the homepage. Of course, manufacturers can (and some do) choose to use the open-source version of Android to build their own custom operating system, but then they will find themselves right back in Option 1 with a small developer network. Not even Amazon has been entirely successful with that strategy on its Fire tablets and smartphones.
THE SMARTWATCH SCENARIO
In the emerging smartwatch category, Apple may eventually sell 20 to 30 million smartwatches annually. All of the producers of Swiss watches together sold only 29 million watches in 2014.
Swiss watchmakers are now boxed in. For decades, they focused on brand and a luxury image without focusing on new technology. When the first smartwatches (not Apple’s) were introduced, they were dismissed as underpowered and ugly. But the Swiss watchmakers failed to take prompt action.
What they missed is what most incumbents miss. Apple and the other technology companies are not interested in wristwatches per se. The Internet giants look at the wrist as real estate, and they are stunned that the watchmakers have done so little to develop such desirable parcel.
Apple and the other smartphone makers see the wrist as territory that is ripe for colonization.
Initially their smartwatches will be underpowered accessories for the smartphone. Over time, however, given miniaturization and the enduring magic of Moore’s law, those smartwatches may someday evolve into a substitute for full-featured phones.
As for the Swiss watchmakers, it’s far too late to flip their hardware business into a software business. Most of them will fail to develop an ecosystem for software. As Elmar Mock, one of the inventors of the Swatch in the 1980s, told Bloomberg Businessweek, Apple’s entry “will put a lot of pressure on the traditional watch industry and jobs in Switzerland.” There are only two moves left to the Swiss watchmakers: compete against Apple by fostering their own fledgling software ecosystem, or retreat upscale into ultra-high-price luxury, just as the digital camera makers did when the
smartphone vaporized cheap compact cameras. Low-end watches will be vaporized.
Traditional watchmakers TAG Heuer, Montblanc, and Swatch Group have all announced that they will launch their own versions of a smartwatch in 2015. Those who persist in the attempt to develop their own software will find the temptation to adopt Google’s software and ecosystem increasingly appealing when they face the onslaught of competition with Apple.
THE CONNECTED CAR SCENARIO
Sales of cars connected to Apple and Google’s entertainment systems are growing ten times faster than the overall auto market. Seventy-five percent of the 92 million cars sold in 2020 will be connected, according to market analysis by BI Intelligence. This is a mixed blessing for the
automakers. Like the watchmakers, they will face a tough choice. They may choose to partner with Apple or Google, or they will attempt to launch their own software system for in-car apps and
entertainment. As of this book’s publication, fifteen auto manufacturers had adopted Apple’s CarPlay system, and more than twenty carmakers, including General Motors, Audi, Honda, and Hyundai have adopted Android Auto.
Some carmakers, including Ford Motor Company and Fiat Chrysler, will choose to offer both systems. Previously, both companies had developed their own in-car entertainment and sync systems for smartphones, but the negative feedback from consumers drove them to adopt both Google and Apple solutions and abandon their own.
Today, most automakers believe that they have firewalled Apple and Google away from the critical systems that manage the performance of the automobile. Forty automakers, including Audi,
BMW, Chrysler, Ford, General Motors, Honda, Mercedes, Toyota, and Volkswagen, took the unusual step of licensing an alternative OS called QNX from BlackBerry, the ailing smartphone pioneer. The
QNX operating system plays nicely with Apple and Android software for personal entertainment in the
car, but it keeps those systems at arm’s length from automotive functions. The automakers’ strategy depends greatly upon BlackBerry’s continued independence, which is far from certain. In other words, the auto industry is just one strategic acquisition away from becoming dependent upon Google, Apple, or another tech giant that might swoop in and acquire QNX, jettisoning the rest of BlackBerry the way Google did with Motorola. If that seems unlikely, consider that Apple has
$194 billion in cash on hand. That’s enough to buy 483 of the S&P 500 companies. Apple could buy Tesla ($25 billion) and Amazon ($134 billion) and still have billions left over.
The entertainment systems from Apple and Google may be the thin end of a wedge. Gradually, as drivers grow accustomed to the user interface and personalization offered by Google and Apple in the dashboard, consumers may develop a preference for these richer experiences. At that point,
carmakers will be unable to rip either system out. They’ll be hooked. Once the Internet companies gain a beachhead in the car, they will naturally seek to expand.
Later, in the mid-2020s, when robot vehicles finally become commercially viable, Google’s and Apple’s grip on the in-car experience might be strong enough to enable either firm to ram the fat end of the wedge into the vehicle, sliding a layer of proprietary software between the hardware of the car and the apps, content, and passenger experience of an autonomous vehicle, just as Microsoft did with the PC. At that point, cars will become less about driving and more about riding passively and using mobile apps. If this happens, Ford, General Motors, and Volkswagen may begin to resemble the
former consumer electronics giants Panasonic, Sharp, and Sony. Or Compaq, Dell, and HP, the bygone leaders from the PC industry. Or like Nokia, Motorola, and Ericsson, to compare the carmakers to the vanquished colossi of the mobile phone industry. The Internet companies will attempt to steal the value right out of the automotive industry by controlling the data layer in the car, leaving Detroit stuck with the low-margin metal, leather, and rubber.
In the meantime, Silicon Valley tech firms are already cranking up the competitive pressure, recruiting talent from Detroit automakers. Apple has hired more than 200 people to work on an electric car project called Titan. And Google has already demonstrated its own version of an
autonomous vehicle that will debut in prototype form on the streets of Mountain View, California, in summer 2015. The fact that Silicon Valley is working on vehicles is enough to keep future-minded Detroit executives awake at night.
ASK YOURSELF
> If your company produces products, how might these be transformed by the addition of computer power and network connectivity?
> How might a third-party developer enhance your smart product with an app?
> How might a broad deployment of your smart products be connected into a smart network? How will that change usage? How might that generate new value or new business opportunities? Who else might benefit from participating?
> What is your company’s policy regarding consumer data? How big a priority is this for your firm? Does your company conduct routine security audits on your software products? Are they resistant to tampering, hacking, and data interception?
> Who controls the data layer in your industry?
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