How Googles Modular Phone Threatens Apple and Samsung


Chunka Mui, Contributor

January 20, 2015

Much of the analysis of Google’s new modular phone wrongly focuses on the cool factor of its Lego-like interchangeable parts and whether consumers will buy into it. The focus on consumer acceptance is important, of course, but misses the real threat that Google’s Project Ara poses to smartphone manufacturing giants—and especially to Apple and Samsung Electronics.

Today’s smartphones are tightly controlled, closed systems. An oligopoly of hardware manufacturers dictates the design and release cycle of new phones. They are the sole arbitrators of what goes into each model, and when.

As a result, manufacturers enjoy a chokehold on innovation and immense power over both suppliers and customers. They have the power to throttle innovation up or down based on critical factors beyond technological viability—such as competitive dynamics, supplier relationships, target markets, economies of scale, upgrade cycles, planned obsolescence and so on.

At the heart of Project Ara is a modular hardware architecture strategy that reimagines how smartphones are designed, manufactured and sold. If successful, Google could disrupt the industry’s current dynamic and threaten, in particular, the immense market power and profits that Apple and Samsung enjoy.

Take cameras, for example. Advances in camera capabilities are high on the list of features that induce consumers to upgrade their cameras. In addition to raw pixel density, the industry has unleashed a steady stream of enticing features like selfies, panorama shots, slow motion, time lapses, and so on.

Current smartphone cameras are tightly intertwined with the big manufacturers’ closed platforms. To make it onto those platforms, new capabilities must adhere to the complex interdependent technical and physical constraints of each phone. They must also submit to the manufacturer’s immense bargaining power. Buyers only get to choose from a few options and must buy an entire new phone in order to get new cameras. As a result, few third-party developers pursue smartphone camera hardware innovation.

Project Ara changes this dynamic. It becomes technically and economically viable for third-party developers to push faster and deeper camera development. They might build specialized lenses for market segments too small for big manufacturers’ one-size-fits-all mass market strategies. They might offer interchangeable lenses for different applications. Ara’s design rules reduce technical complexity and ensure compatibility. Ara also provides a visible path to the marketplace. Consumers could choose to upgrade only their cameras rather than entire phones, or they could choose to upgrade more frequently than typical upgrade cycles.

The same holds true for displays, keyboards, memory, speakers, batteries, sensors, and endless other capabilities that most of us have yet to imagine.

History shows that modular architectures can ignite tremendous innovation while unleashing devastating consequences for market leaders.

In “Design Rules: Volume 1, The Power of Modularity,” Carliss Baldwin and Kim Clark lay out the theoretical underpinnings and cite numerous examples of this competitive dynamic.

In the computer industry, for example, the dominant architecture in every generation of computing up to (but not yet including) smartphones evolved from relatively closed to more modular. IBM’s modular System/360 mainframes wiped out early closed-architecture competitors like UNIVAC. Sun’s open architecture and its adoption of the open-source Unix operating system beat Apollo’s proprietary design in high-end workstations. The open TCP/IP standards beat a number of closed networking standards. The open IBM PC architecture beat out the closed Apple Mac.

The pattern in each case in the same: A clear, well-formulated set of design rules, including architecture, interfaces and standards, ignites an ecosystem where companies compete at the module level. This drives down module cost while enhancing innovation and, over time, the more open architecture wins.

How might the smartphone industry be disrupted if a similar pattern unfolds? Here’s one scenario:

A viable ecosystem of plug-and-play modules makers emerges on the back of Google’s market-creating investments. This, in turn, gives rise to a new tier of Ara-compatible phone manufacturers. Not unlike the rise of IBM PC-compatible personal computers, third-party companies could leverage Google’s open architecture and economies of scale to build competing phones.

Specialized camera lenses and apps for avid photographers? Displays and controls for serious gamers? Smartphones with displays and interfaces for designed specifically for juniors and seniors? Health monitors to help manage one of a range of chronic diseases? All these, and numerous other specially-designed phones, become possible.

Initial niche success induces second-tier, money losing manufacturers like Motorola, Sony, LG and HTC to jump on the bandwagon, thereby making the Google architecture a viable competitor to Apple and Samsung.  This also further dashes Microsoft’s efforts to revive its smartphone fortunes.

For a dramatic illustration of how modularity might threaten Apple and Samsung, consider what happened to IBM. As Baldwin and Clark point out in “Design Rules,” IBM’s market value in 1969 was equal to 71% of the total market value of the entire computer industry. By 1996, no player accounted for more than 15% of the value of the industry. Rapid innovation dramatically increased the industry’s total market value but dispersed that value across sub-industries that emerged around important modules.

Many dominos must fall into place for a similar dispersal of value to occur in smartphones. With Google’s deep pockets and strategic interests orchestrating the threat, however, it is a scenario that has to be taken seriously. Apple and Samsung, which enjoy more than 100% of current smartphone industry profits, certainly have a lot to lose.

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This article was written by Chunka Mui from Forbes and was legally licensed through the NewsCred publisher network.

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