Value Quadrants: understanding value creation in mobile

from: http://www.visionmobile.com/blog/2008/05/value-quadrants-understanding-value-creation-in-mobile/

- On the bottom left quadrant, value is created from intellectual property (hardware, software, patents and industrial design) during handset creation, development and production - examples include Nokia, Android, Flash, IDEO, Qualcomm and Cibenix.
- On the top left quadrant value is created through tools licencing, i.e. tools for building and managing software, content, UIs and services - examples include Adobe, Teleca and Trolltech.
- On the top right quadrant value is created from infrastructure (hardware and software) used to deliver services - i.e. to view, edit, share, buy and deliver software, content, UIs and services in general - examples of companies in this space are Vodafone, Nokia (Ovi), Google, Admob, Bango and Logica CMG.
- On the bottom right quadrant value is created from monitoring and activation of on-device assets- in other words from monitoring usage of devices, software, content, UIs and the network. Examples are Carrier IQ, m:metrics and Bluestreak.

Mapping revenue models with Value Quadrants
Value Quadrants become more interesting when you observe how revenue models change across quadrants. Starting from bottom left and moving clockwise:
- Pre-sales, on-device revenue models are typicaly per-unit royalties, per year maintenance fees and per-project fees (NREs, platform porting fees, etc)
- Pre-sales, service-related revenue models are tools licensing, i.e. per-developer-seat or per-CPU, as well as per-year support contracts.
- Post-sales, service-related revenues come from usage fees (per-user, per-active user, per-use, per-level), subscriptions or advertising fees (CPC or CPM).
- Post-sales, on-device revenues come from activation of on-device software and from monitoring and analytics for device/network performance and usage monitoring.

It’s no secret that with operating margins of the order of 8-12% handset OEMs are finding it tough to survive and invest in R&D. Moreover, in the case of embedded software, the sale value is dropping, driven by 5 market forces;
- Linux, which is commoditising the OS kernel
- WebKit, which is commoditising browsers
- Android which is commoditising Java and the whole OS space,
- Mediatek, which is commoditising the business of hardware & software reference designs and
- Flash, which is commoditising rich content platforms (see Adobe’s April 08 announcement for zero royalties for Flash Lite).

Furthermore, industrial design firms have also been under pressure in the last 3 years, as OEMs and even ODMs (e.g. Flextronics, Lawton & Yeo) have been developing in-house ID divisions.

The only type of value that is sustainable is essential patents; which is where both Nokia and Qualcomm have a stronghold. The LTE cross-licensing pact between Alcatel-Lucent, Ericsson, NEC, NextWave Wireless, Nokia, Nokia Siemens Networks and Sony Ericsson is another testament to the importance of essential patents, which can easily command 5% or more of the handset wholesale price. I would argue that essential patents are the most sustainable source of revenue for the handset industry in the foreseeable future.

So where is value creation migrating to ? The answer is simple: to the remaining 3 quadrants. For example:
- Adobe has been aggressively subsidising Flash Lite (2% of Adobe’s revenues) in order to drive sales of its industry-leading tools. Microsoft has been following a similar strategy for its mobile division, investing cash to its hemorrhaging Windows Mobile platform for years in order to drive Visual Studio and Office sales; same for BREW and Qualcomm’s QCT (chipset) and QTL (licensing) businesses.
- Google has invested in acquiring Android and developing the OS in order to multiply the advertising inventory that will boost its post-sales ad business. Nokia’s Ovi will also rely on Trolltech’s Qt as a service substrate, in which Nokia invested over 100 million euros. Nokia’s whole mobile organisation is in fact banking on Ovi as the vehicle to transition Nokia from a manufacturing and software development business into an internet services business.
- Mobile software vendors are flocking away from per-unit royalties into per-activation fees, as network operators are more willing to invest in revenue share opportunities rather than up-front licensing fees; Bluestreak is a such an example of software vendor in what we see as the rule rather than the exception in mobile software revenue models. Moreover, a new revenue stream is emerging in the form of monitoring device, network and service usage (and the subject of a VisionMobile report on Mobile Service Analytics that is due to launch soon).

Value Quadrants are discussed extensively in a forthcoming VisionMobile report titled ‘Mobile Business 2.0: Opportunities for business model innovation in the mobile market’. For additional insights into the migration from data ARPU into Channel ARPU see also the article Making money on the last mile: introducing Channel ARPU.

Comments welcome as always.

- Andreas