The Platform Thesis and the Mobile Market, Part 1

by: Tulip Farmer

Every decade or so an investment opportunity arises when a device becomes a platform. In the computing world, a platform is a device or service that customers buy primarily because they want the third party applications that run on that device.


Let's look at what happened historically when a company and its device is anointed as a "platform". In the 60's, the IBM mainframe became such a platform. There were other computer manufacturers at the time - Honeywell (NYSE:HON), NCR, General Electric (NYSE:GE), RCA, Univac, and Burroughs. As the market matured IBM emerged with the lion's share of the mainframe market and the others either failed or were pushed into niche markets. In the early 80's there were many desktop microcomputer manufacturers with their own operating systems - Commodore, Radio Shack (NYSE:RSH) (TRS-80), Altair, Apple (NASDAQ:AAPL), Wang, etc. Then IBM introduced the PC with Microsoft's (NASDAQ:MSFT) MS-DOS and this time it was Microsoft's software that became a platform due to the open nature of the hardware. Microsoft took over 90% of the market and the only other survivor was Apple, left with less than 10% of the market.

Note that I'm ignoring the workstation, supercomputer and minicomputer markets of that period because of their incompatible O/Ses, none of which achieved the unit volume or developer focus necessary to become general platforms. It's possible that the mobile phone market turns out that way, but as a participant in those markets as well as the ones that did become platforms, it seems to me that mobile phones are already a platform for two reasons 1) the mobile phone market is literally billions of users - several order of magnitude larger, thus with greater network and scale effects. 2) developer focus led by Apple and Google's (NASDAQ:GOOG) superior technology and marketing.

The Pattern

Platforms have network effects and economies of scale. Software developers want customers so they focus their development on the platforms with the most users. Users want applications so they buy the device with the most software developers. Development is hard work and every additional device a developer needs to support is a big investment, so they try to minimize the number they develop for. Because of this effect, there is usually one big winner in a platform war, one or two much smaller survivors in niche markets, and a bunch of dead bodies.

The Opportunity

Today there is a new category of product that I'm betting has achieved platform status - the mobile phone. Apple's iPhone, RIM's (RIMM) BlackBerry, Nokia's (NYSE:NOK) N8 and the Android phones from Motorola (MOT), HTC and others all have more computing power than those early PC's in the 80's. They have hundreds of thousands of applications spanning every imaginable function, and they have moved beyond early adopters into the mainstream consumer market.

So far none of this is news. What does appear to be news to many in the investment community however is the implications for the mobile handset manufacturers like Nokia and RIM that are not on either iOS or Android. The winning platform is the one with the most and the best applications as that's why customers buy the device. Nothing else has the ability to change who the winner will be - not the features in the OS, not the hardware, not IT loyalty, not the current size of the customer base, and not the current handset shipments.

The developer community today is focused on iOS and Android to the exclusion of other devices and has been for most of the last two years. I know this as my day job involves interacting with hundreds of developers. Third party surveys like this one say the same thing. So the game is already over - iOS and Android have far more and better applications today than Nokia, RIM, Palm (remember them?) and developers are widening the gap every day. Where developers go, buyers follow. It no longer matters if RIM comes out with a better OS or a new device, because developers only have the bandwidth to support one or two platforms well, and they've already made the investment in iOS and Android. The only chance for survival Nokia and RIM probably have is to adopt Android or retreat into tiny niche markets. Even the king of low cost handsets Nokia has to worry, because in 5 years even low end mobile phones will have iPhone 4 level capabilities. There will be no single function simple phone market because hardware will continue down the path of Moore's Law toward lower cost and higher function. Just like single function personal computers like Wang's word processors disappeared when the IBM PC came out, so will mobile phones that only make calls.

This blog posting is already too long, so see Part Two for thoughts on capitalizing on this trend.

Disclosure: Long GOOG, AAPL, MOT. Short RIMM, MSFT, NOK