For people looking to gain insight into how markets work, I would suggest that they take a look at the article by John Gapper in the Financial Times titled "Europe Has Paid a Price for Losing Its Mobile Lead."
Mr. Gapper writes specifically about the events that have taken place in the mobile sector, focusing on the acquisition of the Vodafone (NASDAQ:VOD) stake in Verizon Wireless by Verizon (NYSE:VZ) and the purchase, by Microsoft (NASDAQ:MSFT), of Nokia's (NYSE:NOK) handset operations. His analysis looks at the reasons for these deals, particularly since, at one time, Vodafone and Nokia had clear leads in the marketplace over their primary competitors, especially their competitors in the United States.
"It is a tribute to the U.S. ecosystem, led by Silicon Valley, in overtaking an early European lead that was enabled by regulation and standards-setting. Its depth of capacity to innovate, and the ability of the U.S. telecoms industry to adapt itself, turned the tables," writes Mr. Gapper.
The crucial discussions in the article relate to three specific issues that contributed to the success of American enterprise relative to the European effort. These issues, I believe, are important, not only for the mobile devices field, but are also highly relevant to all areas in terms of the innovation and development of products … and services.
The first issue Mr. Gapper discusses is the role of government in regulation and standard-setting. He writes, "Europe grabbed an early lead in mobile because the EU mandated the GSM operating standard and countries awarded national licenses to three or four competitors, enabling a competitive but orderly market."
That is, the limited playing field defined by the government allowed the European companies to focus on just a few options for development and they rapidly moved into those areas and came to dominate the early markets.
The United States, on-the-other-hand, did little or nothing to define standards so, initially, there was much searching and many alternative paths taken in order to discover what worked best and what could be brought to the market place that resonated with potential customers.
I remember those early days and the concerns being expressed by many that the Europeans were getting so far ahead of the Americans and that we here in the United States were going to be dominated by European brands. As Gapper describes, "That put the U.S. behind on its rollout of second generation and then third-generation technology."
However, we now know the rest of the story. And, we now see Vodafone and Nokia selling out these once "leading-edge" efforts.
Now, I am not saying that government does not have a role to play in the development of new technology. In fact, there are a lot of new publications arguing that the government has a very important role to play in the creation and evolution of technology in society.
There are two basic problems that can occur in government-encouraged initiatives. First, governments don't always choose the best regulations and standards. In the case of the mobile phone, the EU made a good choice and this greatly benefited the companies chosen to work in the industry, creating competitive advantages that were initially enhanced by restricting further entry into the industry in Europe.
This does not always happen as has been seen in the case of solar panels in the United States.
Government involvement may be good, but, if the decisions are not the "best" ones, the government must move on as quickly as possible to adapt to "better" potentials. The problem here is that governments don't like to admit they are wrong and tend to continue to support efforts that are leading nowhere.
The second problem is that the companies that develop successful new technologies get comfortable and fail to do the take advantage of their initial success. Of course, if the regulations and standards do not allow them to adjust, then they are stuck and another way must be found to meet the new competition. This seems to be what has happened in the European situation.
Comment: government can help promote innovation, but, there are problems if a government does not hit the "best" version of the product, or, if the government limits the future evolution of a successful innovation.
The second issue has to do with government limits on the definition of the technology. In the case of mobile devices, according to Gapper, the "tussle" moved from operating standards to "a fight over operating standards." That is, there is more to a product than the government may be aware of.
Comment: when a "new" generation of technology hits a market the options available to supply a market extend beyond just what "satisfied" the market with the earlier generations market. Companies focused in on just the earlier generations options may not respond rapidly enough to a broadening of possibilities.
The third issue has to do with the definition of the industry a company works within. Gapper writes that the European competitors acted "to maintain the mobile world as a walled garden." That is, the European firms tried to constrain the mobile world to just the mobile world. This is becoming less and less of a feasible strategy in the modern marketplace.
Comment: industry lines are breaking down. More aggressive companies are studying "arenas" now rather than industries because so many products are finding that they overlap in so many ways with other product spaces that they cannot just operate in a "walled garden." (For more on this see my post, "Investing in an Age of Transient Competitive Advantage.")
Mr. Gapper closes his article with a warning to the United States: "Samsung (OTC:SSNLF) has taken Nokia's place as the biggest handset maker and China is now the biggest market for Android and iOS devices. What the US did to Europe, Asia could yet do to the US."
And, this applies to other industries as well.
In other words, in order to sustain yourself in today's world you cannot become complacent and lulled into inactivity in what you produce and who you serve. Time horizons have become shorter and shorter. And, you must be open to other aspects of the product you are overseeing and the "arenas" that your products are a part of. Just ask Vodafone, Nokia, and BlackBerry (NASDAQ:BBRY).
But, this applies to governments as well.