Disrupting innovations: Linux and mobile phones

Thoughts based on Clayton M. Christensen, and his book “Innovator’s Solution”. The basic tenent is that product (or service) quality increases faster than the consumers’ ability to utilize it. This is true of most industries. This has two major consequences:

1. It’s possible for a company to start with a poor product and develop it to be better than what’s necessary.
2. When a product line overshoots (becomes better than needed), a flip in the value chain will happen.

The first consequence means that a startup firm with a new low-quality product (like Sony’s first transistor radios) should not attempt to immediately develop it to match existing alternate solutions, because the cost of development will be huge. Instead it should target the market that currently cannot use the existing solutions – even a low-quality product is better than none. As the product improves in time, it will start taking over the existing solutions’ market shares.
When a product is not good enough, it needs to be improved and optimized. That means that the product layers above and below must be modularized (or commoditized) for the optimization to be possible (to optimize a CPU, the motherboard needs to be modular, as well as the silicon chips and transistors that are used in CPUs). When the product overshoots, it will be commoditized and modularized, allowing for the layers above and below it to start optimization increasing quality (when mobile phone architectures become good enough (as they soon will), they will become modular, which allows the subsystems to be optimized, as well as the services built on top of the architecture).
The organizational changes in the value-chain change radically when a flip occurs as a product becomes modular. Profit is always best made in the layers that are being optimized – since they are not good enough yet, customers will pay for improved versions. The modular layers, however, do not gather great profits, since they are good enough and anybody can produce them.
What does all this have to do with Linux, then? Well, Linux is a modular and open OS, unlike Unix and Windows. Windows and Unix have provided good revenue to their makers, since they’ve been integrated products with good profit margins – the producers of the subsystems have had to build deoptimized products, to fit the proprietary OS. Also the producers of higher level applications have had to adapt their products to fit into the OS. Linux (and OpenSolaris as well) is now changing that playing field: a modular OS is allows its subcomponents to be optimized, and also allows the applications to be optimized to specific uses. Instead of the development happening in the OS, the OS is now the modular architecture, that allows improvement of the subcomponents (drivers and lower level services) as well as applications (building Linux-based customized solutions, such as the Nokia 770 Internet tablet).
Why can Linux do this? Because it is not targeting the users of Microsoft Windows (even if Microsoft likes to think Linux competes with it, it actually does not), but the users that Windows does not serve. On the one hand Linux is good for geeks that need extra control of the OSs, but more importantly, Linux is good for those who cannot afford Windows. There’s a couple of billion people in southern Asia that can’t afford Windows licenses. While a Linux desktop might have problems and not be as good as Windows, it’s better than nothing, which the users have had before Linux.
Another area where Linux is gaining is in the web server sector. There’s no way Linux can compete with mainframe OSs, but the web servers are a new area where the traditional OSs can’t cut it.
And because technology always evolves faster than the users’ ability to use it, Linux will catch up. In some years (maybe a decade), it will be good enough for the average consumer and for corporate mainframes. But right now the modular Linux platform allows the optimization of services (like Apache, MySQL, the GNU C compiler, and countless others) as well as applications (Google, Yahoo, eBay, Nokia 770, and many more).
Linux is a good example of a disrupting innovation – it will disrupt the existing products and services, forcing them to either flee away (to concentrate on their own high-fidelity customers that demand the best) or to disintegrate (become modular and allow competition to form in the adjacent layers). Disintegration is the inevitable outcome for older players, and since modularization means lesser profits, they also need to change tactics – move up the value chain, to be specific. Microsoft will need to start concentrating on services that can be used on top of any OS. There’s no money to be made in OSs in a few years, since Linux (which cannot generate revenue as it is free as in beer) will take over the OS market. Money will be made in producing and selling better subsystems and better applications (the adjacent layers). Whether or not Microsoft can make this transition pretty much decides its fate. And the companies that have been creating added value to a modular OS during all this time will have an advantage.
The same trend is also happening with mobile phones. Nokia is a strong player in mobile phones, which have been proprietary, optimized products. It has has large profit margins, while its subcontractors have had no profits to talk about. But the mobile phone architecture it getting good enough. This is when the flip will happen: the phones will become modular, and the profits will move to the subcontractors who will start optimizing their components that any phone assembler can then use, as well as those who will start creating added value based on the modular mobile phone platform. Looking at the higher level, this has already started to happen – there’s only a couple of standards that can be used to create applications. But the challenge for Nokia is to survive the transition at the lower level. When the profits move from the phone assembler’s level to subsystem developers, Nokia’s current business model will be gone.
Nokia’s strategy has been chosen already: they’ve given away the OS for free, which means that they will start buying their component suppliers soon – not to integrate them into themselves, but just to get a hand on the profits they will get when their products start having better margins. Another possibility is to just stay at the integrator role, buy components (and encourage very high competition in that market to drive the prices down) and provide added value in the way of services and software components built on the modular, open OS that they’ve released. Time will tell.