What Is An Ecosystem And Why Does It Matter To Smartphone Makers?

by: John-Michael Scott

I'd like to offer everyone a thesis here as the pundits continue to debate the future of the global wireless communications market - the concept of "resistance to change" also known as "switching cost" and its supporting element - the "ecosystem". So what is a switching cost - well, a quick jump over to the world's favorite search engine will tell you that it represents the negative impact/cost that someone faces as a result of changing from one supplier to another for a service or a product. Switching costs can be monetary - like the termination fee associated with changing your wireless carrier - psychological, effort-based and time-based as examples.

In the world of Enterprise Software from Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL), Google (NASDAQ:GOOG), SAP (NYSE:SAP) and IBM (NYSE:IBM), the players go to great lengths to create their own equivalent of switching cost - known as "Vendor Lock-in". This has led to lawsuits at times when the "lock-in" has been considered too extensive and proprietary, leading to some famous Microsoft and Apple (NASDAQ:AAPL) lawsuits in the past. Nonetheless, the holy grail of any service or product provider is to create this sort of a moat around itself in order to establish challenging barriers to entry and to maintain the strength of its market position as long as possible.

So, how does this matter in the mobile marketplace today? Without question, from Google to Samsung (OTC:SSNLF) to Nokia (NYSE:NOK), Amazon (NASDAQ:AMZN) to Microsoft, Blackberry (BBRY) to Apple - every single major player in this marketplace is in a race to establish as much lock-in as possible.

But, how do you go about establishing lock-in - can't I just change phones whenever I want, switch carriers whenever I want, and use all my music, apps and everything else however and whenever I want?

Well - let's go back to the definition and of switching cost and see what we come up with - the elements we were offered were money, psychology, effort and time.


Google: You get to spend money on apps, music, movies, books, magazines and TV.

Nokia/Microsoft: I'm sticking these together since they are in bed together in the mobile space right now - you get to spend money on apps, music, movies and of particular note to enterprise users - you get to use Word, Excel and PowerPoint directly on your mobile phone - editing documents, presentations and spreadsheets on the go. Missing from this list are books, newspapers and magazines. There are reasons that there have been rumors around the potential for Microsoft to buy up Barnes & Noble (NYSE:BKS) getting the Nook content channel - lots of store space to position Microsoft Surface and the notable benefit of "saving a bookstore", albeit a big-box bookstore chain.

Amazon: Again - apps, music, movies, books, magazines, newspapers, TV shows. In an interesting twist, Amazon felt the need to fork Android and create an app store separate from Google's.

Blackberry: Not to be left out, Blackberry also offers apps, music, movies and TV shows. Books, magazines and newspapers are also missing here. Uniquely - Blackberry has a well established "secure email" offering that has been a staple of corporate email for years. Unfortunately, some Blackberry specific email outages have put some dents into Blackberry's legendary bulletproof secure email offering.


Apple: Like everyone else - apps, music, movies, TV shows + books, newspapers, magazines + iTunes U, iCloud backup.

Ok...on to Psychology:

Google - a household name, the verb of search, #4 on the list of companies that people hold in highest esteem - as much as Microsoft would like people to Bing it - I don't know anyone who doesn't think first to Google it. Pros - extremely well known; frequently creates free products that people get genuine value out of; most trusted maps application; most common OS platform in the world today for mobile. Cons - multiple privacy lawsuits; rising tide of malware; wide discrepancy in OS version out "in the wild" causing mixed experiences with the devices and the apps that run on them; not as profitable for developers and therefore not considered "1st platform to develop on".

Nokia/Microsoft - also household names. Pros - extremely well known; MS Office secret sauce - I want to be able to see my PPT, DOC and XLS files wherever I go; considered a perennial contender in technology - most people believe that Microsoft will be "around"; novel UI stands out from the pack of similar user experiences. Cons - both companies are considered to have failed to keep up and are struggling to remain relevant - vying for #3 in what some consider a 2 horse race; limited apps; no books, newspapers, magazines without third party app like Kindle for Windows Phone.

Amazon is a household name and notably, the company held in highest esteem among consumers according to Harris Interactive's latest public opinion poll. Pros - see previous statement; committed to creating a vetted marketplace of apps - aka tested for security and validated to be malware free; forked Android to enable a more controlled user experience - reinforcing trust and reliability; one of the broadest marketplaces for music, movies, TV shows, books, magazines and newspapers. Cons - chasing Apple in the tablet space from a deep come-from-behind position; no Amazon branded phone;not as profitable for developers and therefore not considered "1st platform to develop on".

BlackBerry - household name in the enterprise, international across all demographics. Pros - unique secure email network. Cons - competing for #3 from a deep come-from-behind position behind NOK/MSFT; multiple missteps with consumers; serious lost faith and legions of lost users who have left the platform; limited marketplace; not as profitable for developers and therefore not considered "1st platform to develop on"; complete misstep with tablet offering; considered a has-been by much of the marketplace despite pundit commentary.

Apple - household name among consumers; #2 in esteem among consumers in the Harris Interactive public opinion poll mentioned above. Pros - most well-established mobile ecosystem for apps; competitive ecosystem for music, books, movies, TV shows, magazines & newspapers; unique multimedia book options; ubiquitous experiences across multiple device footprints (iPods, iPads, iPhones) for apps, books, movies, TV shows, magazines and newspapers; unique set-it-and-forget-it backup & storage to the cloud model; long standing leader in brand loyalty according to Brand Keys survey - until February of this year (this is a Pro that has turned into a Con). Cons - perceived to have lost the innovation spark post Steve Jobs; perceived to be expensive; 1st platform to develop on by developers due to higher profitability; "it just works" factor - Apple has put very high emphasis on design and usability standards.

And now for the big switching cost categories in the case of "Smartphones" as opposed to traditional "Feature phones" - effort and time.

Google: there are some well known statistics among developers regarding how many apps have been paid for on Android - people who want to pay less for their "Smartphone" also tend to pay less for their apps, music, movies, TV shows, etc. Since Android users have traditionally purchased less, the major switching cost here is time and effort. How much time does it take to move my "stuff"? How hard is it to move my "stuff"? This is like switching apartments - if you bought a lot of furniture - then it's more time consuming and harder to move. It is not clear from the statistics that Android users have a large collection of "things they can't do without" - apps, music, movies or otherwise that can not be easily moved from one device to another. Samsung has not yet demonstrated that it can support a strong content marketplace that is independent of the variety of general Android marketplaces available. This is an interesting point of departure for Samsung that may cause some substantial shifts in the smartphone business. Arguably - if Samsung demonstrates some serious Innovation and decides to also fork Android - then Samsung could change the playing field for Apple, Google and others. Samsung is a contender for #1 or #2 and despite a recent lackluster & unimpressive launch event - is still one to watch. In general though - right now - there doesn't appear to be much that prevents an Android user from switching between any of the numerous devices within the Android marketspace. There is a resistance to vendor lock-in within the audience that appears to be strongly cost driven and removes time and effort to switch as a strong challenge.

Nokia/Microsoft - the case for low vendor lock-in on the Nokia/Microsoft Windows Phone driven platform is much simpler; with little time in the market, a relatively small number of users and less content available overall, users have not had too much time to accumulate sufficient content to drive the problem of time and effort to switch.

Amazon - it will be interesting to see whether Amazon inspires this type of challenge when most Amazon specific "players" and "readers" are available on all major smartphone experiences despite the Android focus in Amazon branded devices. Right now, Amazon is, in a way, Amazon's own worst enemy from the standpoint of lock-in. I can and have used my Amazon player app on my iPad and I've been using my Kindle app on my iPad, iPhone, PC Laptop and MacBook Air for years. There really isn't as yet anything that prevents me from buying a Kindle Fire today and then swapping it out for Samsung's latest tomorrow...except - Amazon made a decision a while ago to do something game-changing - Amazon committed to validating apps. People have seldom looked closely at the impact that Apple had by making this seemingly inconsequential decision - suddenly all the small shareware/freemium/individually developed or developed by small business "apps" became palatable to the consumer. Apple brought trust to buying software from random individuals all across the globe. Amazon is doing the same for the Android market - and as malware continues to rise - this becomes more and more critical to consumers.

Blackberry - again - like Microsoft and Nokia - Blackberry is in a rebuilding year or years to take a term from team sports. Having just brought its new mobile OS to the market, no one has had any opportunity to become married to the platform and divorce isn't even something that any of us have had to think about yet.

and finally...

Apple - time and effort - you know - if you got every single one of your songs in the years since Apple moved away from DRM (digital rights management aka copy protection), you can transfer your music library pretty easily - but those movies, books, newspapers, magazines and apps? Only if the publisher of that content has made some specific provision by providing their own app of some sort. iCloud adds to the story - all those hours you spent on low quality CD ripping to your PC or Mac - now you can use iTunes Match and they are uniformly of the same quality as every song you've ever downloaded from iTunes. You may or may not find the apps you are used to from the iPhone ecosystem on Android, Windows Phone or Blackberry OS. Additionally - if you've bought into Apple's better together premise and paid for that iPad and maybe even Apple TV? It get's complicated indeed. So for the time & effort switching cost - despite 3rd party apps and a few "its so easy anyone can do it" articles from pundits - Apple has succeeded in creating a tough ecosystem to leave.

And now - a Table:

Switching Cost Factors & Average Score (1-5)

Platform Money Psychology Time Effort


Google (Google, HTC, Samsung)

2 4 3 3 3
Windows Phone (Nokia, Microsoft) 1 1 1 1 1
Amazon 2 5 1 1 2.25
Blackberry 1 3 1 1 1.5
Apple 5 5 4 5 4.75

What all of this leads to is a recognition that the smartphone industry is no longer solely dominated by which carrier offers the best deal, which phone offers the best features, or which brand has the best perception. We've moved into the whole new world of "ecosystems" - where the whole is greater than the sum of the parts. And - depending on how far you've gone down the rabbit hole in your investment into the ecosystem, you may be in the clutches of vendor lock-in. As an investor - this is great news - none of us hates reliable earnings and vendor lock-in goes a long way toward supporting the same consistency in the smartphone world that it has enabled in the enterprise software world that Microsoft has dominated for so long. For me, the consumer, though, as long as I don't feel taken advantage of by my smartphone maker, mobile OS provider, wireless carrier, and as long as I get to use all my apps & media - I'm probably not going to switch just because I can use my eyes now on Samsung to switch pages or change apps.

So, how about you - how far down the rabbit hole have you gone? Are you locked-in to your smartphone?

Disclosure: I am short BBRY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long on a call for AAPL. I may take additional short and long positions within the next 72 hours in several of the stocks mentioned.