Read the case on page 89 entitled From PDAs to Smart Phones: The Evolution of an Industry.
Write a 5-page paper (1500 or more words) in APA format in response to the five questions listed on page 92.
Below is a recommended outline.
1. Cover page (See APA Samplepaper)
a. A thesisstatement
b. Purpose ofpaper
c. Overview ofpaper
3. Body Conclusion – Summary of mainpoints
a. Lessons Learned andRecommendations
4. References – List the references you cited in the text of your paper according to APA format. (Note: Do not include references that are not cited in the text of yourpaper)
“From PDAs to Smart Phones: The Evolution of an Industry.”
Timing of Entry
From PDAs to Smart Phones: The Evolution of an Industry In the Beginning
In 1966, Gene Roddenberry’s “Star Trek” introduced what some have called the first personal digital assistant (PDA) design mock-up. There were to be no paper or pencils on the Enterprise. Crew members wrote on electronic tablets and used a handheld tricorder to access, process, and display information.1 Such portable processing power sparked the imagination of millions and may well have been
the inspiration for today’s smart phones.
However, it was not until the early 1990s that technology began to deliver on this inspiration. At that time, most speculators believed that pen-based computing would be the next wave of the future. In 1993, Forrester Research Inc. predicted that 298,000 handheld computers would be shipped that year, a number that would increase to 4 million by 1996. BIS Strategic Decisions estimated that 96,000 PDAs would be shipped in 1993 and 2.6 million units by 1997. In early 1994, industry observers were predicting that 1994 would be the “year of the pen,”2 and that the two leading operating systems, Microsoft’s Pen for Windows and GO’s PenPoint, were poised to battle for the spoils.
From 1990 to 1993, a small flurry of companies entered PDA development. The players included well-known computer makers such as Apple, IBM, Hewlett-Packard, and Motorola, as well as start-ups like GO Corporation, EO Inc. (which was bought by AT&T), and Momenta. Because they used pen-based input and because of their size, PDAs and their success rested upon the evolution of several enabling technologies, including handwriting recognition software, modems, and the miniaturization of power and memory.
Several of these enabling technologies were not ready for use in PDA manufacture by 1993. Handwriting recognition software was a particular problem. Though accuracy rates had approached 95 percent, users still found the 5 percent inaccuracy to be very unsettling. Modems also posed problems. Many felt that the key feature of a PDA would be wireless connectivity. But in the early 1990s, modems were nicknamed “bricks” because they were large and heavy; achieving wireless connectivity in a PDA would have doubled the weight and size of most devices.3
Constraints on processing power and battery life also compromised the performance and/or size of the PDA. Even to replicate streamlined versions of office software products required significantly more memory and storage than was found on a typical electronic organizer. Additional memory and storage added to both the size and cost of the device. Greater processing power also required greater battery power, which affected the size of the end product.
Market Confusion about PDAs
Compounding the technological problems was a lack of market awareness about the functionality and potential functionality of pen-based PDAs. For PDAs to become viable in the market, companies had to sell large volumes to achieve the necessary economies of scale and recoup development costs. But the market was still very immature in the early 1990s. PDAs were expensive compared with desktop systems, and potential users were not sure about their performance, their compatibility with their current computer systems, or the availability of software.
Not only were user needs poorly addressed, but there also was a question about who the major market users would be. Some companies clearly envisioned the PDA as a mass-market consumer electronics device, while others saw it primarily as a tool for mobile executives. Still another group of companies envisioned the PDA for particular industries (“vertical markets”) as a more specialized device that could allow inventory scanning or in-field sales estimates.
In 1993, only a small market of early adopters were placing orders for the new PDAs. Then, Microsoft announced it would be entering the pen-based arena with its product, WinPad. Upon the announcement, many of the early customers withdrew their orders to see what Microsoft was going to do. Microsoft’s previous experience in the computer industry was a strong indicator that if Microsoft entered PDAs, it would likely control the dominant standard and its products would have the greatest software compatibility. Furthermore, if a PDA had a Microsoft interface and software, it would capitalize on consumers’ current training and experience with Microsoft products. As it turned out, however, Microsoft did not become serious about pen-based computing for several years, so its announcement stalled the market acceptance of PDA technology.
Many of the pen-based PDA companies began to falter by 1994. While several of them had made great technological progress and had working products, they did not yet have a revenue base coming in for the products, so many of the companies began to run out of capital. Momenta had been a front-runner in the pen-based computing market and had attracted several big-name executives (e.g., Delbert Yocam of Apple Computer), but it ran out of money and was dissolved by the fall of 1992. The breaking point for GO came in 1994, when after months of negotiations, Compaq chose to work with Microsoft instead of GO for its pen-based computers. Having lost $75 million, the company was bought by AT&T and absorbed into AT&T’s EO Personal Communicator division. AT&T shut down the project shortly thereafter, noting that the handheld market had not turned out as well as it had expected, and projected that the industry was leaning more toward the smart cellular phones concept.4
As of 1996, price and features had still not reached an appropriate convergence for most vendors or users. AT&T, Compaq, IBM, Motorola, NCR, and Toshiba had all invested millions of dollars in developing pen computing hardware and software, but by 1996 they had all either scaled back dramatically or abandoned the market.5
Surviving Companies, Forging a PDA Standard
Some companies and/or products survived the shakeout. Many of the vendors who focused on specialized devices for vertical markets weathered the storm quite well. Telxon, Psion, Fujitsu, Casio, and Sharp all continued to thrive. The big winner, however, was a relatively late entrant called Palm Computing. The founder of PalmPilot, Jeff Hawkins, set out to design a product that was fast and
simple, and would sell for less than $300. The product did not debut until January 1996, but 350,000 units were sold by the end of 1996, and a million units were sold within 18 months of its release. The PalmPilot had attracted the support of some 12,000 developers by January 1999,6 and by the end of 1999, it controlled 77 percent of the worldwide market share for PDAs, and Microsoft’s Windows CE
operating system had a worldwide share of only 13 percent. It appeared that a dominant design in PDAs had finally emerged.
Palm’s advantage was not to be long-lived, however. The collapse of the tech-sector bubble at the end of the decade sent the company reeling, financially devastated by inventory it could not move. To make matters worse, corporate users were being steadily wooed away from the Palm platform by Research In Motion’s Inter@ctive Pager (a two-way pager that enabled users to send messages over the Internet via a wireless data network) and BlackBerry. Though the original BlackBerry lacked many of the functions possessed by the PalmPilot, its primary function—rapid and wireless Internet messaging—proved very addictive. Unlike the pen-based PalmPilot, the BlackBerry used a QWERTY keyboard that was optimized for using the thumbs to type. It gained such an enthusiastic following that the device earned the nickname “Crackberry” (referring to the addictiveness of sending and receiving messages).
The Arrival of Smart Phones
By 2002, an industry-wide transition to smart phones was on the horizon. Smart phones integrated PDA functionality in a wireless telephone. Whereas some PDA models had wireless phone capabilities in the form of a clumsy phone module, smart phones emphasized the styling characteristics of a mobile phone, and thus were more comfortable for use as a telecommunications device. However, unlike regular cell phones that have some organizer capabilities, smart phones had larger, sharper screens that could display regular Web pages rather than the small subset of Web pages designed to be readable on cell-phone displays.7 They also typically enabled users to take pictures and download music or other data. Smart phones had higher margins than PDAs (at least initially); however, the convergence of PDAs and mobile phones also meant that companies that produced PDAs (such as Palm and Compaq) were now to be pitted against very large and established mobile phone rivals such as Nokia, Motorola, and Samsung. Over the next five years, Palm, Research In Motion, Nokia, Motorola, Samsung, and HTC battled each other for the rapidly growing smart phone market, with each generation packing in more features and memory while simultaneously trying to whittle down the price to capture the consumer market. By 2006, analysts were estimating that just over 13 million smart phones had been shipped in 2005,
while PDA sales had virtually ground to a halt.
Nearly all of the smart phones relied on tiny keyboards akin to those on the original BlackBerry, suggesting that the pen-based interface was on its way out. A game-changing event occurred in June 2007, however, when Apple made a splashy entrance to the mobile phone market with its iPhone. The iPhone had a sleek form factor, and an elegant and intuitive interface that relied on a touch screen. The
device also capitalized on the enormous success of the iPod by being able to down- load and play both music and videos. The iPhone was considered a huge commercial and critical success, selling more than 1 million units in its first 74 days.8 The iPhone was also locked into an exclusive arrangement with AT&T, so other carriers scram- bled to find touch screen–based phones with which to compete against the iPhone.
The growing sophistication of smart phones dramatically increased the role of software and applications, heating up the battle to control the dominant operating system for smart phones. By 2008, the three biggest proprietary operating systems were Apple’s iPhone, Research In Motion’s BlackBerry, and Microsoft’s Windows Mobile. Handset makers could also, however, choose from three open-source
platforms: Android (a Linux-based platform developed by Google), LiMo (“Linux Mobile,” backed by a consortium of 50 handset makers), and Symbian (which had previously been a proprietary consortium-backed platform, but was bought out by Nokia in 2008 and transferred to open-source).9 The only clear winner was the consumer—so long as the industry did not consolidate around a single platform,
all of the companies would compete through vigorous innovation, bringing more to users for less. By the end of 2007, sales of smart phones had reached $39 billion and were expected to grow to $95 billion in 2013, thus making up nearly half of the mobile phone market by value (and 34 percent by number of units).10
For the most part, these companies failed because they did not have the capital required to wait for customers to learn about and value the functionality offered by a PDA. In addition to waiting for customers to learn about the PDA’s functionality these firms also had to wait for developments in several component technologies
including, handwriting recognition software, modems, and batter and memory power. Microsoft delivered a final blow to these early PDA companies when it announced it would be entering the industry with WinPad. This caused most buyers (the few that there were) to wait for WinPad and stop ordering from these early entrants. This is a great example of a company leveraging its reputation to thwart the establishment of a dominant design before the firm has a chance to enter.
Is there anything early PDA companies could have done differently in order to survive?
This is a complex question but there are some things we can learn from the PDA companies’ experience. First, early entrants need much more capital than they think they do because the revenue base will be very small for a long period of time. This suggests that early PDA companies might have benefited by seeking joint ventures (or even being acquired as Palm was) by larger firms with deeper pockets. The formation of a consortium among early PDA companies, developers of complements, and developments of enabling technologies might also have helped create convergence in the form PDAs would take, and help time PDA development to more closely mirror the development of crucial complements and enabling technologies. This consortium could have helped to combat the effect of Microsoft’s announcement (by delivering a unified message to the distributors and retailers that were affected by the announcement), and could have pooled the companies’ resources to provide a means for educating potential customers. It might have also benefited PDA companies to focus on more specialized with more clearly defined needs and higher willingness to pay before attempting to enter the mainstream consumer markets (the likely benefits of this course of action is underscored by the fact that it was the firms that marketed specialized devices for vertical markets that survived the shakeout).
Why was Palm able to be successful where so many others had failed?
Palm was probably successful because they entered late (1996) when a greater understanding of consumer preferences was beginning to emerge (i.e. Palm learned from other’s missteps), and by producing a simpler, less expensive device that presented a less complex and risky buying decision to consumers. These two factors enabled Palm to start earning revenues more quickly after bearing its development expense. Palm also extended its capital resources through being acquired first by US Robotics and then 3Com.
Was being late to the smart phone market a disadvantage for Apple? What factors enabled Apple to successfully enter when it did?
Being late does not appear to have been a disadvantage for Apple. Apple capitalized on the fact that many enabling technologies (such as batteries and memory) and complementary technologies (such as GPS, wireless internet, etc.) were becoming well-developed, permitting the company to offer a smartphone that had a streamlined and stylish form factor, as well as an exceptional range of features. One of Apple’s key competencies is the ability to develop a very intuitive and attractive interface (like it did with the Mac), and this interface was significantly more valuable with a complex full-featured smartphone than it would have been with a simpler device like the Palm.
Are there increasing returns in the smart phone market? Is it likely to eventually pick a single operating system as the dominant design?
This is a good topic to have the students to debate. On the one hand, there are clearly increasing returns in that complements are very important (students may point, for example, to the popularity of Apple’s App Store, and how the size of the installed base of iPhones attracts developers of applications). On the other hand, many of the other important complements are compatible with a range of operating systems (e.g., WiFi, GPS). Furthermore, the phone service providers are large and powerful, and are likely to actively oppose the rise of a single dominant standard as this dominance would give a single vendor great bargaining power.
What are some of the advantages of entering a market early? Are there any advantages to entering a market late?
Early entry can afford the first mover the opportunity to establish brand loyalty and technological leadership, both of which can increase its installed base. And if the market is characterized by increasing returns to adoption the first mover can garner two additional benefits from 1) moving up the learning curve before their competitors and 2) building an installed base that keeps increasing due to the self-reinforcing nature of network externality processes. Entering a market late, however, can be cheaper, easier, and more certain. The late mover can avoid much of the development expense and risk borne by the early movers, and can fine-tune the product to fit customer needs (which are now more certain) better.
Can you think of an example of a successful a) first mover, b) early follower, and c) late entrant? Can you think of unsuccessful examples of each?
Students should come up with a variety of examples from their previous experience. Identifying successful first movers are tricky because for each example, it is usually possible to identify an earlier technological precursor that someone else might consider to be the first mover (this is related to the discussion in chapter 2 about most inventions really being recombinations of existing ideas. This can inspire some interesting discussion among students. The list of failed first movers and successful early followers is long easier to identify, for example (from Lasalle Systems Leasing White Paper Series, http://www.elasalle.com/IDC/importent.html).
Visicalc led in the creation of spreadsheet software, only to lose to Lotus 1-2-3 and later to Microsoft Excel.
The Xerox Star computer was the first PC with a graphical user interface. Has anyone heard of them?
The first Jet Airliner in passenger service was the DeHavilland Comet. Boeing and Airbus are now the leading firms.
An example of an initially successful (but ultimately unsuccessful) first mover and successful early follower can be found in the market for arterial stents (a tube that opens arteries during angioplasty). Johnson and Johnson was the first to market in 1994 and initially captured 90% of the market. This success was short-lived. Three years later, Guidant introduced an improved stent and within 45 days had 70% of the market (http://www.fastcycle.com/htm/First%20Mover%20or%20Loser.htm). Many Japanese and Korean firms have been successful by entering into industries such as semiconductors, steel, and focusing on making them far more efficient. For example, several Korean firms (e.g., Samsung, Hyundai and Goldstar), became major players in the production of integrated circuits in little more than a decade (Mathews & Cho, Journal of World Business, Vol. 33, No. 4, Dec 1998). Other examples of late entry success would be IBM’s entry into the personal computing industry in 1982 and Target’s entry into retailing.
What factors might make some industries harder to pioneer than others? Are there industries in which there is no penalty for late entry?
Industries that are characterized by a new-to-the-world technology or functionality (the Segway provides an example here) are likely to be harder to pioneer than others. A firm that invests in new-to-the-world technology will incur not just the costs of the successful technology but also the costs of all the technologies that did not become marketable products. The introduction of new-to-the-world functionality requires the first mover to educate potential users and will require enormous patience and deep pockets before significant returns can be achieved. In addition, the necessary suppliers, distributors, and complementary goods may be non-existent making the industry even more difficult and costly to pioneer. Industries that require major changes in other industries in order to succeed (as with the example of hydrogen cars) are also difficult to pioneer as they require the cooperation of many different stakeholders. Industries that have very high minimum efficient scale are probably very costly and risky to pioneer (think, for example of the difficulty in pioneering the production of jet engines, submarines, energy production, etc.). Students may come up with others.