Google Android Open Source Strategy – Fueled Market Dominance in Blue Ocean Smartphone Market – Criticism, Threats & Future Outlook 2015

Android is a pack of software for mobile phones that contain an operating system with middleware and key applications which was originally developed Android Inc. that was acquired by Google  in 2005 and T-Mobile launched the G1 Android phones manufactured by HTC in 2008. Android is now the largest OS in the smart phone market with 44% market share in Q3 2011. Android is an open source mobile platform where any one can create applications and sell them through Android Market. Android has close to half million apps in Android Market as of now. Android phones are being launched by mobile makers like Samsung, Motorola, HTC and other players that are easy to use and often come with functionality and features that are more powerful and useful than the Apple iPhone. Android phones were initially launched with bigger screens, resolutions, multi touch screens & powerful chips like 1GHz Qualcomm snapdragon processor compared to 512 MB RAM of iPhone. Google is also investing in building its own smartphones as it recently announced to buy Android phone maker Motorola Mobility for $12.5 billion. Android Market is where developers sell their apps and the number of Apps in the Market has rose rapidly in the last two years. Android also has support from multiple networks AT&T, T-Mobile, Verizon, Sprint, etc.

Google still has central control over the code but allowed various manufacturers to flood the Market with Android phones at various price points and the wireless operators have pushed them into the market through advertizing and various subsidies on the devices and data plans. Consumers too embraced the device as suggested by market share figures. Google Android targeted the 81% percent market that were not using the smart phones and target this uncontested market as part of the blue ocean strategy, with devices that had features, functionality and apps. Google strategy is completely opposite to Apple strategy of total control of the hardware, software and ecosystem. Android completely opened its ecosystem to the developers and the mobile manufacturers and it has do it since it is targeting the rest of the 80% market that Apple ignored and it realized it cannot do it alone with its proprietary product. Google initially launched its own mobile device called Nexus and it realized how tough it is to manage the product that it developed. Google announced the Open Handset Alliance to create an open platform (Android) for a Linux phone that can run mobile Google apps and others. The 34 partners include T-Mobile, Sprint Nextel, NTT Docomo, China Mobile, Telefonica, Telecom Italia, Motorola, Samsung, HTC, Qualcomm, Intel, etc. Google is also looking to control its android ecosystem and is asking licensees to follow certain guidelines. Google strategy has worked well and it gave dominance over the smartphone market.

Android Success factors and Criticism

The first and foremost factor for Android tremendous success is the Google decision to let Android be open source platform. Google formed the Open Handset Alliance with 34 partners that included Wireless carriers, mobile makers, chip makers and independent software vendors. All these partners have flooded the market with smartphones that not only increased the size of the smartphone percentage to the overall market of the mobile phones but also provided consumers with a wider choice of handsets with various features and functionalities. Google too supported these partners through the continuous improvement of the Android Platform (Upcoming 3.0 Version) and mobile makers launched handsets that are superior in performance in terms of hardware, software and designed handsets that attracted consumers to buy. Marketing and advertising strategy by the mobile makers and wireless carriers is also significant factor as there have been some good advertisement campaigns like the Motorola Droid etc, and the subsidies in terms of price and data plans by wireless carriers. The brand awareness of Android has increased tremendously and it is evident from the dominant market share of the Android phones in the Global Smartphone market. Added to this the reputation of Google itself also played a significant role and Google enjoys the confidence and trust which it gained from search and other apps. The failure of Research in Motion’s (RIM) Blackberry, Nokia’s Symbian phones and delay in launch of Microsoft Windows Phone 7 also help propel the Android into market dominance. Samsung, HTC and Motorola have launched handsets that have been able to attract the mobile users and are giving stiff competition to Apple iPhone.

Superphones are another category that is dominated by Android and the units are increasing slowly. Superphones are high-end smartphone devices that feature a display measuring more than 4-inches and are powered by a processor of at least 1GHz. The success of Android Marker Place where apps are sold and bought is another success factor. Developers are developing apps for Android devices and the number of apps has reached close too half million. But the fact remains the number of downloads and the revenues generated by the Android apps is lesser than the Apple’s iTunes and App store. The availability of many apps is attracting consumers to buy millions of Android phones along with price reductions and various subsidies. The average selling price of Android phones is lesser than the iPhone and so the margins. Android phones are also criticized in terms of the quality as the phones suffer more failures when compared to iPhone and the software updates are not provided to all the consumers as various mobile makers make handsets with different specs which cannot be upgraded on a common platform. Android updates come regularly but handset owners cannot update their phones as the mobile makers’ from whom they bought the devices don’t provide them. The sheer number of android devices and different manufacturers is a cause of concern and Google which has the central control on the Android is tightening the screws by asking the licensees to stick to the standard guidelines.

Steve Jobs criticized Android had stolen key features of iPhone and its operating system and vowed to destroy Android. Microsoft claims ownership of patents on several technologies used in Android and is collecting royalties from mobile device manufacturers like HTC and filed suit against Samsung, Motorola, etc. Apple is suing HTC and Samsung for patent infringement in terms of multi-touch, zoom, etc and filed suit in court and claims with the US ITC, asking to ban imports of Samsung and HTC devices running Android. Oracle is suing Android claiming it violates Java-related patents. Google is also supporting all the device manufacturers that are using Android in the legal cases relating to patent infringements and it is promising OEMs all the necessary support across the globe. Google recently acquired Motorola Mobility for US$ 12.5 billion which not only strengthens their mobile strategy with Motorola patents that came with the deal but also affect the way the Android ecosystem will be controlled and run in future.

Android Future Outlook
Android phenomenal rise in the last two years has caused ripples in the smartphone market. Every player in the smartphone market like Apple, RIM, Nokia and Microsoft have total control on the hardware, software like Operating System, and ecosystem as a whole but Google went against this total control to open source make Android available free to all the stakeholders and adopted a strategy where in they don’t want to compete with iPhone at the top end of smartphone market rather focus on the 80% market that are not iPhone users. This has worked really well for Android as the mobile makers have flooded the market with Android Phones and captured 45% of the smartphone market. Google close collaboration with manufacturers including the chip makers and carriers who needed devices and ecosystem to counter the dominance of Apple iPhone as Apple dealt with only AT&T and all other carriers flocked Google Android for competing. This has worked really well for the carriers, android phone makers, to the consumers. Android phone makers sold millions of devices that are high, mid and low end at all the price points. This also caused some problems like device failures, software updates and Android reliability is under question. Google started to focus on this issue and has come with standard guidelines for the licensees. Most of the software updates are not available for devices and consumers are facing difficulties in upgrading their software and some instances have to pay for updates also. Android has to come with a strategy to allow users update their phones.

The legal problems and the patent cases look ominous and expected to affect the Android mobile phone makers and overall android market share. Analysts and Research Firms expect the Android market share will be less than 50% by 2015 as the android makers have to pay royalties and fees in respect of the Legal cases and settlements and will definitely raise the cost and ultimately the prices. Oracle, Microsoft and other companies that are suing Android and mobile makers are not only asking for royalties but also seeking bans on the usage of  specific technologies, functionalities & features and which will force the mobile makers to invest money and resources to develop ways to go around and develop their own technologies. Apple is trying to ban Android phones in various markets but did not have much success till now. Google legal battles are scaring the mobile makers and forcing them to look at alternatives for Android. These will definitely slowdown the Android growth. RIM and Microsoft that are not at all doing well presently, have developed own OS and devices and are launching them next year are confident to regain their lost market share. RIM and Microsoft are slow to come up with the advanced technologies, but analysts and research firms believe that Microsoft will recover its lost market share at the expense of Symbian and RIM is expected to hold on to 13-14% market share in 2015. Nokia adoption of Microsoft Windows Phone 7 as primary smartphone operating system and Samsung and HTC looking to launch more Windows Phone 7 phones with support from Microsoft will work in improving the Windows Phone 7 favor.

Google recent acquisition of the Motorola Mobility is also causing concern for the mobile makers. Mobile makers think Google will not provide total support for the other Android phone makers and will hold critical android updates with itself thus causing them problems. But there is still no clarity, how Google will use the Motorola Mobility whether it will use it to create benchmark designs, reference experiences and products for the android makers as Motorola has a great design and development team. Google has designed Android to offer three types of handset projects: Experience handsets (based on Google specs and branding), Partner handsets (compliant with Google’s Android specs, but with no Google involvement or branding) and DIY handsets (take the source code and fork it, but you‘re on your own, e.g. China Mobile’s oPhone). Google also have to launch marketing and advertising campaigns along with the device manufacturers and wireless carriers to push more android phone into the market. Google does not look at Android as its core for making money but it wants Android to increase access to the Internet as it is looking to increase the increase the number of devices will help it increase its ad revenues through search, email, and other apps. Google is committed to Android and it is promising support to mobile makers that are launching Android phones as Android is essential for Google future revenue growth. More number of mobile devices with internet capability will provide an opportunity for Google to increase its revenues as the mobile users need browser for browsing internet, search engine and applications. But it needs to control the ecosystem in terms of uniformity of devices, prices features and how software is updated. Android is also extending into tablets and other devices like TVs, etc and the success in this segment will also play a major role in the future development and growth of Android.

Major threat for Android growth is Apple launch of new iPhone that is focused on the mid range market and emerging markets. If it is launched in next year then Android will see very tough competition along with the legal battles. Apple is an iconic cult brand that will rapidly erode the Android market. The legal battles may have affect on the prices in terms of prices of handsets raising but the price of Android devices even with the raised prices will be lower than Apple iPhone. The average selling price of high end Android devices is very close to iPhone but the margins per device is low and mobile makers have to look to improve their margins. Google Apps revenue is far lesser than Apple Apps revenues. Google realized that Apple initially created market for Android Devices in 2008 and because of Apple focus only on High end market and single device model led to the rapid growth in volumes but the smartphone has changed in 2011. Nokia, RIM and Microsoft have lost their market share as they were unable to meet the consumer demand and read the smartphone market correctly. Their loss was Android gain, but now Microsoft have realized their mistake and launched its latest Windows 7 OS and has tied up with Nokia, Samsung, HTC and other mobile makers to launch smartphones using their OS. RIM too is launching its QNX OS based Blackberry 10 series phones in 2012 and confident that it will regain its lost market share. Wireless carriers and mobile makers are looking for third ecosystem to counter Apple iOS and Google Android and hope Microsoft Windows Phone 7 will give them this edge and it is getting the same support that Android got initially that helped it to market dominance. Smartphone market has seen significant changes in 2011 and changes are expected to continue in 2012 and Google Android strategy has to be changed accordingly. Google needs to settle the legal battles, control more tightly the android ecosystem, keep close eye on its competitors as they are launching new products next year and look to increase its install base as it will help increase the Google revenues.

Apple iPhone no longer in Blue Ocean Market- Change in Strategy essential

Apple launched iPhone in 2007 which is an internet and multimedia enabled Smartphone with touch screen and has totally redefined the Smartphone market. Apple iPhone has become a cult device and five generations of iPhone models have hit the market till now and Apple sold more than 100 million units till now. With half million applications in app store for the consumers to play with, iPhone is a great device that revolutionized the Smartphone segment with features like a portable media player (iPod), an Internet client with email, web browsing capabilities, multi touch screen, 3G connectivity, camera, etc. iPhone has provided consumers with an unique experience and has generated significant revenues and profits. Apple iPhone created a blue ocean market where it has total control of everything from the product design, pricing, software, app store and development to the way it markets and sells its iPhones. Apple had a created an uncontested market at the high end of the smartphone market and its iPhone has offered the mobile users a very unique experience that has become a benchmark in the smartphone industry that all the other players are trying to achieve. Hardware, software and the developer ecosystem is the best in the world and Apple is dominant player in the application market. Developers love to work on the Apple OS as it is one of the best OS in the world and it allowed them to create numerous applications and make money selling them. Apple developers get 70% revenue of the sales.

Initially only AT&T was authorized to sell the phone but many other carriers across the world are selling. Apple had been able to sell the iPhone at a premium and consumers are more than willing to pay the premium because iPhone was such a magnificent device with functionality and half million applications in the app store that allowed its users to use for everything. Apple has total control on the hardware, software and provided limited access to developers to its code and it tightly restricts the apps on its app stores and allows only apps that are approved by it. Apple has single product and price strategy and focuses all their R&D, engineering, hardware, software efforts on just one product. Apple has the highest profit margin per iPhone and its pricing strategy has been remarkably as it launches its new versions at higher reference price and subsequently lowers the previous versions price. Recently it reduced its iPhone 3GS price to zero with contracts and it is not relying only on hardware sales but also on the sales of apps, music, movies, videos etc on its iTunes store.

Apple iPhone has transformed from a GSM phone to a 3G network capability in second version but the screen size and the home button placement remained as a standard. The 3GS models came with a bigger difference like faster processor, better camera with video and better OS. The iPhone 4 is thinner with a wider brushed stainless steel band, aluminosilicate glass panels, with video conferencing capability, high resolution display and powerful A4processor. The iPhone 4S came with 8 mp camera with video recording, face detection, dual core processor, multi-standard wireless support and a natural language voice control system called Siri. Apple iOS, the operating system initially developed for iPhone has been extended to iPod Touch and iPad. There have been five versions till now and it has been enhanced further with multi tasking capability in fourth version and the OS has been constantly developed to add more functionality and features.

Change in Apple iPhone Strategy

Apple has always believed in quality rather than quantity and focused on the high end premium market. iPhone has been costly when compared to other smartphones but Apple tried to keep the premium pricing close to its competitors premium model price. Initially AT&T was the only carrier selling the iPhones until February 2011 and since then Verizon and Sprint started selling iPhone and in October 2011, C Spire Wireless announced that it would be carrying the iPhone 4S. iPhone was originally launched in six countries in 2007 but now Apple has launched it in around 100 countries.  For the first time Apple has three models of iPhone 3Gs, 4 and 4S with prices ranging from Zero for 3GS with contract, US$ 99 for 4  to US$400 for 4S. Apple has to reduce the price for the older models as the Android Models have flooded the market at the lower price levels and have successfully captured the market and made it the number one in the smartphone market in just three years. Another factor that forced Apple to reduce the price despite good 4S sales and not make the 3GS obsolete is that there has been no wow factor for the 4S model as the consumers were not attracted by the faster chip, better camera and voice activated personal assistant software Siri.

Apple has also been criticized for not having a proper pricing strategy for the emerging markets as iPhones come with huge price tag. There have been a rumors that there will be smaller version of iPhone specifically targeted towards the emerging markets but till now it is no there. But Apple is reducing the price of the older versions of iPhone but these versions are outdated and with less features and functionality compared to the Android phone models that come in all sizes, prices and powerful hardware. Dependency only on the high end market will lead to limited revenue growth but with significant margins. Most of the analysts and Research firms forecast Apple to keep its market share at around 16-18% of smartphone market by 2015. Other Smartphone players like Samsung, RIM, Nokia, and Microsoft are aggressively looking to improve their market shares with new products. Even Android that is holding more than 50% smartphone now is expected to hold around 50% market share by 2015. Initially Apple did not focus much on the enterprise segment but with businesses and other organizations changing their strategy where they are allowing employees to bring in their own devices and integrating them with their IT infrastructure, Apple has a good opportunity to improve sales in this segment. Some of the companies are even buying iPhones as enterprise device for their employees as Blackberry is losing out due to product failures. Apple needs to support its enterprise sales team.

Smartphone market - Red Ocean

Smartphone market has become a big Red Ocean with many mobile makers launching phones that are even more powerful and feature and functionality rich than the iPhone. There has been patent wars going on between all the players and each one of them is trying to block others legally but they are not able to do it. Android, Microsoft and RIM are also invested heavily in their ecosystems and wireless carriers are looking to have multiple eco systems so that they can offer more choice to their customers. Wireless carriers, Google, Microsoft and Mobile phone makers except Apple are looking to convert more mobile phone users to smartphone users. They have been successful in their strategy as the percentage of smartphones has been rising and expected to reach 50% of the total mobile phone market. Apple has to be part of this strategy and look for a less costly iPhone as the reliance only on the high end premium market will always be risky. And there is also a risk that all the other players will bring down the average selling price and no matter how iconic and cult following the brand has Apple will loose the market to its competitors. The success of the Samsung Galaxy phones, HTC Smartphones and the yet to be launched new phones from Microsoft and RIM next years will be deciding factor for the Apple iPhone future success. Smartphone makers are adopting various strategies to survive in the market like collaborating with software developers, investing in R&D for designing new devices with differentiation, attracting more developers to develop more apps and also working closely with wireless carriers to understand the local market dynamics and consumers.

Application store iTunes with Apps was Apple’s another success factor. But now Android has Android Market Place with Apps matching Apple’s app store, Nokia Ovi Store and every mobile manufacturer coming up with their own app stores, Apple is loosing its advantage. Developers are developing for other stores as they are also competitive 70-80% revenue share. Apple also launched another unique offering to its customers which is the iCloud, iPhone users can back up and store their data and content on the cloud. Everybody in the Smartphone market is investing heavily in R&D and realized innovation is must for success in the market. Consumers are looking for powerful devices that offer them more functionality and feature and help them in their day to day life. Mobile manufacturers are launching low price smartphones in the emerging markets that come with essential smartphone features and are pushing them through the wireless carriers with subsidies in price and data plans. Wireless carriers are also upgrading their networks as the smartphones put a lot of pressure on their existing networks and they need to push more smartphone to recover their investments in infrastructure. Marketing and advertising strategy is also essential as the mobile manufacturers have to invest millions to promote the products and educate the consumers about the device functionality and features as they do not have a brand like Apple that is considered to offer most innovative and disruptive products. Under the charismatic leadership of Steve Jobs, Apple has been able to keep customers interested in its iPhone and sell millions of iPhones, but without Steve Jobs one has to see how Apple will do in the coming years. Apple has to keep its innovating and change its strategy according to the consumer needs and also keep a close eye on its competitors.

Natural Disaster Risk to Business Case Study – Thailand Flooding Hard Disk Drive Shortages Ripple effect on Personal Computer & Chip Vendors

Thailand have been affected by seasonal flash flooding during the monsoon season due to tropical savanna climate and flooding which began in July 2011, still continuing in December but receding slowly has been the worst in 50 years. World Bank ranks it as the fourth costliest disaster as of 2011 surpassed only by the 2011 earthquake and tsunami in Japan, 1995 Kobe earthquake, Hurricane Katrina in 2005. According to Thai Meteorological Department, the rainfall amount of Thailand since 1 January to 31 October was 1822.4 millimeters, about 28 % above normal and the October rainfall was 201.8 millimeters, 10 % above normal. Seasonal rainfall from May to October in 2011 was above normal of 20 – 60% for most Meteorological Station in northern part and of 10 - 40% with below normal in some areas in central part.

Thailand is the world's second-largest producer of HDDs and accounts for 45 % of worldwide hard-drive production, after China and is a major supplier of hard drive parts too. Thailand produces 2.5inch drives that are key components in notebooks and pc. More than 25% of the world’s HDD assembly facilities are located in Thailand’s flooded areas. Seagate, Western Digital and Toshiba are the major manufacturers for HDD and have extensive production facilities in Thailand that are affected. Seagate facilities are not submerged but the component suppliers and Western Digital factories are submerged in water still. Nidec supplies more than 70 percent of all global HDD motors, to major manufacturers. Thailand faces significant competition from Singapore, Malaysia, the Philippines and China and American and Japanese companies dominate sales of HDD, over 65 percent of product final assembly is achieved in Southeast Asia.

Flooding Risk always existed

Despite knowing the fact that Thailand is prone to severe flooding during the monsoon season and it’s after affects, HDD manufacturers built fabs and assemblies in Thailand. Dependency on Thailand for supply and concentration of manufacturing facilities and component manufacturers for HDDs there have not only affected the manufactures but also the OEMs and chip makers that supply chips to OEMs for their personal computers. There have been more than 50 instances of major flooding in Thailand in past 100 years and still HDD manufacturing including the component suppliers built facilities in Thailand. So what made everybody overlook this risk? Thailand had been an inexpensive destination for HDD manufacturers with relatively experienced labor pool, export oriented tariff and tax incentives by Thai Government along with geographical proximity to Singapore, where component parts are brought for final assembly. Businesses have overlooked the natural disaster risk in picking Thailand as the favored destination and this has affected the whole hardware industry particularly the PC and Storage devices.

Impact on HDD Supply

According to IHS iSuppli, the Thai floods will cause a 3.8 million shortfall in PC shipments in first quarter (JFM) of 2012; worldwide PC will amount to 84.2 million units compared to 88 million units predicted earlier, hurting forecasts throughout the year. Total PC unit shipments in 2012 are forecast to amount to 376 million (6.8% YoY), lesser than the previous prediction of 399 million (9.5% YoY) both due to the HDD shortage and weakening demand due to other factors. PC shipments are expected to decline in the first quarter compared to the peak holiday-selling season in the fourth quarter; the drop in 2012 will be far sharper by 11.6% than the 6% historical average decline. Supplies will start to improve in the first quarter, and production would fully rebound by the third quarter of next year, as manufacturers recover or shift production to other locations.

According to DigiTimes, most hard drive manufacturers expect to ship significantly less hard drives in Q4 compared to Q3 like Western Digital 4Q11: 22-26 million (3Q11: 58 million), Hitachi 4Q11: 20 million (3Q11: 32 million) and Toshiba 4Q11: 12 million (3Q11: 22 million). According to IDC, fourth quarter's hard drive shipments will fall about 30% below demand and industry will ship about 120 million units, and demand was 175 million units and the impact will be felt into 2013. Gartner expects a shortfall in supply as demand is for 180 million HDD units for the fourth quarter but only 130 million units will be available, that increases the cost per unit.

Major suppliers in Thailand

Western Digital is the worst affected in the flooding has reported that production of hard drives finally resumed in first week of December  in one of its buildings in Bang Pa-in (BPI), Thailand. All Western Digital's hard drive and component manufacturing facilities in Thailand had been shut down since the week of October 10. Company expects its hard drive shipments during the December quarter will be 22-26 million units. Western Digital expects to resume head slider production in the March 2012 quarter (Q3 FY'12) and also begin production in a new WD slider fab location in Penang, Malaysia, at the same time. 

Seagate appears to be the go-to hard-drive manufacturer amid tight supply as its facilities were largely unscathed, but its “ability to manufacture hard-disk drives has been impacted due to external component supply constraints. Seagate said that it will ship about 43 million units in the December quarter and expects that hard-drive supplies will be “significantly constrained for several quarters. Samsung, Hitachi Global Storage Technologies and Toshiba are also affected by Thai floods. Samsung is more affected in PC business and a reduced demand for dynamic random access memory (DRAM). Toshiba Corp suspended the planned sale of a unit in Malaysia to Amkor Technology Inc due to the impact of flooding in Thailand and is shifting production to Malaysia unit from Thailand.

Most hard drives have upwards of 200 individual components that go into them and many of them produced by individual suppliers in the flooded region. Nidec Corp supplier of hard disk drive (HDD) motors and other components and commenced alternative production of HDD motors at a leased factory in Rayong Province located outside the flooded areas, which is intended to temporarily substitute for the company’s currently inactive Bangkadi Factory. Suspension arm maker Hutchinson Technology still has $50 million worth of specialty manufacturing equipment bolted to their now-submerged factory floor.

Impact on Notebook, PC & Chip Makers
Intel said it expects fourth-quarter sales to come in between $13.4 billion and $14 billion, significantly lower than its previous estimate of $14.2 billion to $15.2 billion due to worldwide hard drive shortage and PC makers are seeing fall in inventories of desktops and laptops, because required quantity of hard drives are not available to put in their computers. As the PC makers reduce their PC stockpiles, they're scaling back their semiconductor purchases from Intel. The company expects hard drive supply shortages will continue into the first quarter of 2012 and PC makers will buy up microprocessors as hard drive supplies recover in the first half of next year.

Lenovo email states that the drives are unavailable for some ThinkPad laptops include 750GB 5,200-rpm models and those with configurations of 320GB 5,400-rpm, 250GB 7,200-rpm and 160GB 7,200-rpm and will have to settle for "off-spec" drives.Lenovo said it will swap unavailable drives for another product the industry can still provide, such as a 5,400-rpm model. Even then, customers will have to wait an additional 45 to 60 days for those drives to become available. AppleInsider first reported on the shipping delay, noting it seems to only affect iMac models with a 2TB hard drive added on to them. Shortage in hard drive pushes the shipping time of the computer out by 5-7 weeks as opposed to the few days that the build to order iMacs usually take to ship.

Dell warned that hard drive shortages could dent its profits as it uses just-in-time manufacturing system so only keeps a small supply of components on hand to reduce warehousing costs. Full-year sales will probably be below expectations due to the hard disk drive shortage and weak economy and the company is trending to the lower end of the range of its revenue outlook of 1% to 5% full fiscal-year growth.Samsung and Acer have said that PC supplies will be lowered due to shortage of HDDs and subsequently prices will rise. Drive prices have increased 20% since the flooding started and Acer have to increase PC prices to cover the higher costs for disk drives. Acer said Q4 sales will be 5-10% lower than Q3 as a result of the floods as compared to flat sales. Samsung says Q4 PC sales will be below previous forecasts, and as a result will pressure prices for DRAMs.

HP anticipated serious impact to November and December forecasted supply as most HDD manufacturers are committing to 50% supply only. As a result HP is expecting severe shortages affecting Desktop, Workstations and Notebook supply and is working very closely with HDD Suppliers to secure priority allocation and lessen the impact on its customers. HP hope to absorb costs related to HDD price increases for as long as possible. HP expects a surge in demand for SSDs and has secured supply of an additional 500,000 SSD drives to help with the expected shortage.

Why supply shortages are continuing?

Thailand produces all the key components for the HDDs and is assembled finally in Singapore and Malaysia. Nidec makes the motors used in 70 to 80 percent of the world's hard drives. Hutchinson supplies hard drive harnesses for a number of manufacturers; TDK makes suspension assemblies, MMI makes electrical components, and Furukawa makes everything from wire and heat sinks to drive platters. All these component manufacturers have exclusive manufacturing facilities in the flooding area and until these component manufacturers revive their production the final assembly units will do nothing. The fabs cannot be shifted easily and relocated to other geographies as the equipment is very costly and takes time to set up newly. It is also not possible to start manufacturing as soon as the flood waters recede as the extent of damage has to be assessed, repair and maintenance are going to take time, involves huge costs and the facilities may remain offline for some time. Seeing the level shortages and the announcements from PC makers the supply shortages cannot be covered by manufacturing from other geographical locations as the major component suppliers are in Thailand and their facilities are still under water. Installing new capacity at new location is not only time consuming but also waste as the new facilities will lead to oversupply as soon as the existing facilities revive their production and the technology is constantly changing.

As the PC makers and other OEMs have to wait for the Thailand flooding to recede and HDD manufacturers and component suppliers can only start operations in the first quarter of 2012, the prices are rising very sharply which is also increasing the cost of PCs. The shortages are also affecting the delivery of the products and most of the PC makers informing customers regarding the delays in delivery and are asking to settle for available lower level off spec drives. Some of the PC makers are hoping customers may even shift to Solid State Drives that are costly. Customers on their end are looking to extend the life of their PCs by using software that clean and defraggler software. Due to the euro zone debt crisis and US economic slowdown the businesses are facing tighter budgets and cannot afford to have rising prices of PCs and storage devices. PC makers and OEMs are hoping the shortages will not be severe as the demand will also be affected by the other factors like euro debt crisis and US economic slowdown.

Hard disk drive supply shortages in the wake of Thailand flooding will continue to affect consumers, computer system manufacturers and corporate IT shops into 2013, according to market research firm IDC. Seagate says that demand is estimated to significantly exceed supply during this time and expects that some companies will optimize unit shipments by manufacturing lower-component-count/lower-capacity hard-disk drives; thereby, only modestly offsetting the growing petabyte shortage. HDD manufacturers, PC makers and OEMs have realized that the only option they have is to wait for the waters to recede and restart the manufacturing as soon as possible and they don’t have any other way to overcome the Thailand HDD shortfall. All the PC makers and OEMs have started informing clients about the inherent delays and prices will rise as the shortages are expected to continue and affect the whole of 2012 and some are even predicting that situation will improve only in 2013. Some manufacturers like Western Digital and Seagate are sounding positive and hope to recover the production fast but they still say there will still be supply shortage in the first half of year and will improve in second half.

Discussion Points:

1. How natural disasters affect the businesses and what businesses have to do overcome such risks?
2. What options do the HDD manufacturers, component suppliers and PC makers have in the present scenario?
3. How to handle the supply shortages scenario and what should be the Customer Relationship Management strategy? ( Manufacturers, Component Suppliers and PC Makers & Consumers)

Global IT Spending 2012 – Key Trends

IDC predicts that worldwide IT spending will grow 6.9% YoY to $1.8 trillion in 2012 and  20% of this total spending will be driven by smartphones, media tablets, mobile networks, social networking and Big Data analytics. Forrester research says IT purchases will be $2.042 billion in 2011 and $2.154 billion in 2012, with the growth driven mostly by underlying economic growth and adoption of newer technology. Gartner forecasts IT spending will be $3.7 trillion (7.6% YoY) in 2011 and expects the IT spending to reach $3.9 trillion (4.6% YoY) in 2012. Gartner IT spending includes Telecom spend and without telecom spend, total IT spend is $1.53 trillion (8.4% YoY) in 2011 and $1.62 trillion (6% YoY) in 2012.

IT spending and budgets did not see any cuts in 2011 but there will be cuts in spending in 2012. There will not be any drastic cuts as IT spending is critical for ongoing business success, but spend scrutiny and conservative plans are expected. The worst case scenario of the total unraveling of the Euro crisis is that the IT spending will increase by 1-2% YoY. This growth will be driven by the emerging economies like India, China, etc. Due to the Euro zone crisis and US Economic slow down IT spending is expected to grow by 4- 6% YoY way below the current levels of 7-10% YoY. Europe will be most affected market compared to US market.

Hardware, Software, IT Services will see single digit growth in 2012. Spends on these categories will be slow as companies will try to cut down spend and will not go for up gradations aggressively. Only business critical spend will be made. Mobile devices such as notebooks, tablets, and smartphones will overtake the PCs. Mobile applications and operating systems revenues will grow and will even surpass the mainframes revenues and the competition is expected to intensify with major vendors like Microsoft, Amazon, Apple and Google coming into market with new offerings.

Cloud Computing will become more competitive as all the major vendors like Amazon, IBM, Microsoft, Google, etc are focusing on creating application platforms and ecosystems. Not only these major vendors but also Indian Outsourcing vendors are developing the cloud based offerings and platforms and are aggressively marketing these to the clients. According to IBM, the demand for cloud computing is on the rise as organizations look to expand the impact of IT to deliver innovative services while realizing significant economies of scale. IDC analysts expect that cloud spending will be $36 billion next year. M&A is also expected in cloud space where the major vendors look to buy smaller and medium players looking to add more applications and content.

Social media is on the rise and it is expected to be critical for the consumers as well as businesses. Businesses are looking for social media tools that help them reach their customers, track their reputation and feedback of the customer and use it internally in the organization to interact with employees. Social media analytics is expected to be a big business as the businesses look for tools and gain critical insights from these tools to determine the effectiveness of their marketing programs, call center performance and cross-selling initiatives. There have been acquisitions in this segment where larger vendors are buying out smaller niche players with good product and platform and integrate it in their core offerings.

According to IDC, Big Data is critical in 2012 as the volume of digital content grows to 2.7 zettabytes (ZB), up 48% from 2011. More than 90% of this information will be unstructured (such as images, videos, MP3 files and files based on social media and Web-enabled workloads) -- full of rich information, but challenging to understand and analyze. 2012 is likely to be a busy year for Big Data-driven mergers and acquisitions as large IT vendors seek to acquire additional functionality. Business Intelligence and analytics key to unlock the data and use the data in organizational decision making and strategy formulations. Analyzing in real time is the future of analytics.

IT and BPO will also see growth in 2012. Clients will look for offerings from vendors that will have significant impact on their businesses. Vendors are adopting cloud computing and also offering end to end platform offerings and are increasingly looking for outcome based offerings that will increase their margins. Indian Outsourcing vendors are forecasting and preparing for the volatile economic situation and are actively interacting with clients on regular basis. As of now vendors are positive but they are expecting definite headwinds in 2012 and are confident to tackle such scenario.

App stores with lot of new applications, intelligent devices with sensors, tablets, and smart phones are being launched and these devices and apps are creating new businesses and are adding more functionality and are being actively integrated by the large vendors in their core product offerings. 2012 will see many new offerings in terms of hardware, software and services and despite the tough and volatile economic environment, vendors will launch them.

2012 will be a tough year and businesses and clients both are cautious about the way that things will turn. The second half of 2011 was supposed to be slow and budget/spending cuts were expected but there were not any drastic cuts. There is a least possibility of a deep recession like the one in 2008 but the down grades and the economic issues will take time for resolving and this volatile economic situation is expected to continue in 2012. Businesses are having strong balance sheets and financially strong but the overall consumer confidence is low due to high unemployment rates and fall in incomes. Emerging markets play a critical role for keeping up the growth and how much these economies are affected by the Euro Zone debt crisis and US economic slow down is also critical fact and these economies can always look for their domestic market as the governments and businesses in these markets are investing in IT for good governance and citizen services.

India Outsourcing Industry - Cloud based Platform offerings by Top Vendors

Indian IT-BPO vendors had realized that there would be demand for cloud services and had started building their own capabilities in order to survive the shift in demand and create innovative new models. Indian vendors moved a step ahead and started building platform based offerings that will be delivered by cloud. This means that cloud computing is standardizing the IT-BPO offerings by the Indian vendors and they have realized the cost and productivity benefits of standardizing processes. Clients too are interested in the standardized offerings and since such offerings are more outcome-based offerings that influence their business values. These cloud based platform BPO offerings are delivered through either public or private clouds or through the data centers.

Traditionally Indian vendors get nearly all of their revenues from the installation, customization and maintenance of software that is branded and created by mostly foreign software companies. There is huge cost and technology expertise involved in development of packaged software hence Indian vendors were more involved in migrating and maintenance. The cloud presents a different scenario for the Indian vendors where they can build their own platform and products and evolve from just migrating and maintenance to running the services for the customers. In cloud computing there is very little scope for continued services in a Cloud market. Cloud based BPO platform offerings present an opportunity for the Indian vendors to develop their own offerings and also helps in increasing the non linear and outcome based revenues that have more margins.

TCS focuses on owning the platform and the services, instead of simply being ‘helpers’ for other cloud brands and wanted to own the brand, the solution and the customer. TCS started wanted its cloud computing offerings generate nearly 10% of its new business together with product revenues over the next few years and planned  to offer standardized solutions across the areas of insurance and banking to multiple customers using same resources. TCS started its platform BPO unit in April 2008 and since then “had seen good traction in human resource outsourcing platform, and had created new platforms in select areas of finance and accounting procurement and analytics. TCS platform offerings have been successful and have seen good traction since last two years and it has seen good success in UK market. With over 30 customers, TCS currently has seven platform-based offering in its BPO unit and 25% of revenues come from platform offerings.

TCS iON - a cloud-based integrated IT solution for Small and Medium Business (SMB) and has already gained over 240 SMB customers who have benefited from increased efficiencies. TCS has already realized the traction for its 'bank-in-a-box' solution among smaller cooperative and rural banks. The solution, which helps these banks automate and integrate their processes of deposits and loans for a fixed monthly rental fee for each branch, already serves nearly 2,000 bank branches. Cooperative banks, including Andhra Grameen Vikas Bank, Uttaranchal Grameen Bank and Purvanchal Grameen Bank, are using TCS' 'bank-in-a-box' solution. Already, smaller organisations, such as Kaya Skincare, Oxford Book Store and Ryan International School, are paying TCS on per transaction basis as they seek to lower their costs of operation further. Non SMB cloud revenues are still at very low levels.

Infosys is banking on innovative cloud-based platform to facilitate client's customized needs and its BPO arm is aiming for $1 billion revenue by 2014. At Infosys Connect, the company introduced 15 Business Platforms under a newly created brand Infosys Edge, a family of platforms that enable customers to buy software on a pay-as-you-go model and offerings range from helping clients with e-commerce businesses to managing human resources and procurement processes. In second quarter of 2011 Infosys Edge signed ten strategic deals. Of these, four were from EMEA, four were from Americas and two were from the APAC region.  Some of the edge platforms are Infosys SocialEdge, Infosys CommerceEdge, Flypp (mobile application marketplace), TalentEdge, etc.

Infosys has about 2000 engineers dedicated to the Cloud products and platforms. Infosys is also building its own data centers in Australia and US and it is exploring the establishment of another in Europe to host new Business Platforms. The company is expecting about 50%-60% of workloads to shift on cloud in next five years, which may yield significant revenues for it. Infosys continues to see strong momentum with its Cloud practice having delivered over 125 engagements till date and The company is building concepts on edge platforms like for mobile banking, medical tourism, etc. It is offering also managing through the cloud the Aircel's Pocket Internet Store. Infosys tied up with Microsoft to provide cloud-based services to clients and will offer Microsoft Private Cloud solutions such as Windows Server Hyper-V and Microsoft System Center, and solutions on Windows Azure to clients.

Wipro is launched cloud computing services through its arm Wipro Infotech and it has around 25 customers. Wipro Infotech is selling two cloud offerings to SMBs – software as a service (SaaS) and infrastructure as a Service (IaaS). Customers are charged per user monthly price model and it has been selling the service directly so far and may start selling through channel partners from next year. Wipro Infotech has applications such as ERP, mail and messaging, human resources management system, dealer management system, hospital information system, vendor portal and learning systems on the public cloud offering and is targeting verticals such as manufacturing, automobiles, healthcare, the microfinance industry, textiles, and education. Wipro has gone in for a mix of self-developed and third party software. The dealer management system and vendor portal, for instance, is Wipro's IP.

Wipro has also offerings in other layers of Cloud including Business Process as a Service (e.g. loan origination as a service), Software as a Service (e.g. bank in a box with leading software vendors, implementation partner to leading SaaS vendors) and Platform as a Service (PaaS). Wipro leverages its Global Command Center (GCC) to provide a unified monitoring and management platform for private, public and hybrid Cloud environments. Wipro Technologies has built a private Cloud for OnStream Utility Metering Services Limited. Wipro is also partnering with other players like Microsoft, Oracle, Amazon, Citrix, etc and offering various platform based services to their clients on the partner’s platforms since 2009.

HCL Technologies announced in 2010 end that new technologies such as cloud computing will become nearly $300 million business over next five years, as part of the company's new initiative to incubate next big opportunities. It had formed a unit called 'ecosystem and business incubation organization', which had already identified five new ideas. HCL Infosystems launched  cloud computing based services branded ‘HCL O’Zone’ with an aim to offer end-to-end cloud based computing solution services to
its customers.HCL’s IaaS services are concentrated on the European and North American markets, with data centers in Sweden and New Jersey. The target market is HCL’s existing enterprise customer base, including a small number of industry-sector clients. Its offering includes standardized platforms for management, integration within a hybrid cloud environment, and a self-service portal and dashboard.  

HCL offers competency based services such as Cloud assessment, migration, implementation and maintenance. HCL has strategic partnerships & collaborations with leading players in the cloud ecosystem. HP has recognized HCL Technologies as the “AllianceONE Partner of the Year” in the category of HP Cloud Computing – Service Provider. Some of these include: Technology/OEM's Partnerships with Cisco, EMC, Vmware, Sun, Microsoft; IaaS: Amazon Web Services; PaaS: Salesforce.com, Microsoft Azure, Tibco; Cloud Management: BMC, CA.

Indian Vendors have realized cloud computing is essential for future growth and are investing in developing the various cloud offerings for the clients. Interesting fact is that instead of restricting themselves to the role of migration and maintenance they are more focused on developing their own brand of offerings and for this they are investing in data centers and technologies. They might be using the platforms, technologies and software of major vendors but they are developing service offerings use them but selling to the clients on their own brand name. Cloud product and services can be developed at a very low cost compared to packaged software and since cloud computing industry is at an evolutionary phase will definitely provide an opportunity for Indian vendors. All the vendors have created separate business units equipped with financial and thousands of human resources focused on creating products and platforms based on cloud. All of the vendors have developed their own IP product and platforms based on cloud and are aggressively marketing them to the clients.

Standardized offerings through cloud are also what clients are looking for as this comes with significant cost savings and no upfront technology investments. But clients have to be careful as there are some issues like data security, outages, contract complications and technology understanding. Cloud computing is expected to be a key offering for the Indian Outsourcing vendors for the non linear and outcome based revenues that have high margins and help these vendors move up the value chain. Platform BPO offerings is another segment where the vendors had been investing in development of platforms since past five years and they have been seeing success in terms of signing of platform deals since last two years. Vendors are also aggressively marketing the platform offerings to their clients and they are aiming for thirty percent of revenues from cloud and platform based offerings in next three to five years.

Sri Lanka Outsourcing Industry 2011 – Forecast 2015

The Sri Lanka IT & BPO industry is projected to grow by 26 % in 2011 with export earnings of $ 392 m in 2010. The industry has set a target of $ 1 b revenue with employment for 100,000 by 2015. This would mean doubling its current earnings of US$ 500 million during the course of the next four years .According to SLASSCOM the total software earnings of USD 294 million are produced by 27,000 people and on the BPO side, 13,000 people produce USD 98 million. There are nearly 300 IT/BPO companies like WNS, RR Donnelly, Amba Research, and HSBC currently operating in the island. The government is keen to provide favorable conditions to outsourcing companies so as to encourage investment, the industry has been granted a 12-year tax holiday. AT Kearney has listed Sri Lanka in its top 50 nations for outsourcing destinations, at 29.

According to ICRA Lanka report, The Information Technology (IT) industry in Sri Lanka includes the hardware manufacturing and software development sectors and the Information Technology Enabled Services (ITES), includes the Business Process Outsourcing (BPO) industry. The total size of the Sri Lanka’s IT market is estimated at US$386 million in 2011, and is expected to grow to US$742 million in next five years. Sri Lanka is not a significant exporter of IT services. The total exports of IT services in 2010 amounted to a little over US$300 million. Sri Lanka’s addressable computer hardware market is estimated at US$265 million in 2011, and is projected to reach around US$489 million in 2015, spending on software remains low, with the estimated addressable market of US$47 million in 2011 to US$98 million in 2015 and IT services spending is estimated to be around US$74 million in 2011 accounting for about 19 percent of Sri Lanka’s total spending on IT to US$155 million in 2015.

Sri Lanka is becoming an attractive location for 'Finance and Accounting Outsourcing' (FAO) with the world’s second largest pool of management accountants and wages lower than India. This according to SLASSCOM which has published an industry report on the FAO sector in Sri Lanka prepared by PricewaterhouseCoopers and sponsored by Association of Chartered Certified Accountants. Sri Lanka has the second largest pool of qualified CIMA (Chartered Institute of Management Accountants) members outside UK. It also has about 80, 000 accountants in training. Global companies, including UK Accounting and Legal Services Center of WNS, Investment Research Center of Amba Research, UK Banking Center of HSBC, and Finance & Accounting Center of RR Donnelley, have set up their delivery centers in Sri Lanka. Also higher education in accountancy is offered by five main professional accountancy bodies, 15 state universities and numerous foreign affiliated private universities operating in the country.

To achieve the one billion dollar target Sri Lanka IT-BPO industry has to improve its infrastructure, and the English-speaking population. Sri Lanka provides a good opportunity to cut costs but there is a shortage of supply of skilled and qualified graduates particularly in the IT field. With the US economic slowdown and European debt crisis, there is a possibility that the IT- BPO industry in the country may slowdown. Most of the work done here is done for US and UK clients. With support from Sri Lankan government the Industry is looking forward to achieve the billion dollar revenue target.  

India Outsourcing Industry – Low R&D spend for Non Linear Revenues

Non Linear revenues are essential for revenue growth. Currently non linear revenues account for only 10%-15% of revenues currently for large IT companies and they are planning to increase these revenues to be 20% of total revenues in the next three years and 1/3^rd of total revenues in five years. Research and Development (R&D) spend is key for non linear revenues. Indian vendors have been investing in R&D for some time and they are not investing significant amounts of money. Infosys is the only vendor that has invested in R&D and it’s investing slightly more than 2% of revenue. HCL is investing 1.4% of revenue in R&D. TCS and Wipro are investing less than 1% of revenues in R&D and they are investing 0.3% and 0.7% of revenue respectively. This is far lesser than global players that invest close to 5-6% of revenues in R&D. Indian Vendors have exclusively set up innovation and research labs with close to 600-800 highly qualified and skilled employees working full time for developing new products and services. Chart: 1 is the R&D spends in Rupee Crore. Chart: 2 is % R&D spend to total revenue.

Chart:1 

Chart: 2

Infosys Labs R&D is focused on applied research in software engineering and other areas of Enterprise IT. Finacle R&D unit is engaged in research of developing new technologies in banking domain. New strategic direction ‘Building Tomorrow’s Enterprise’ identifies new trends that are transforming the client’s business. Areas of research include semantic and language tech for information extraction from social media and for customer engagement, cloud computing, software engineering, security &privacy, etc. Research groups have published two books Raising Enterprise Applications- a Software Engineering Perspective and Process centric Architecture for Software Systems and 125 papers in leading journals in 2011.Infosys have an aggregate of 357 patent applications pending in India and US. The USPTO has granted 22 patents. Source: Annual report.

HCL Engineering, R&D Services group offers end-to-end engineering services and solutions in hardware, embedded, mechanical and software product engineering to aerospace and defence, automotive, consumer electronics, medical devices, networking and telecom, servers, storage and software industries. HCL has started a business unit with a dedicated team to focus on Defence, Space and Security. HCL is investing heavily in developing its own IPs and solutions to help customers' impact the overall product ecosystem faster and better. Solutions include a unified communication platform, a remote diagnostic reusable module, telematics and test platforms in multiple verticals. HCLT has partnered with Cisco, and filed multiple patents in the field of Mobility, Banking, etc. Source: Annual report

Wipro’s R&D focus is to strengthen the portfolio of Applied Research, Centers of Excellence (CoE), Solution Accelerators and Software Engineering Tools & Methodologies. In FY 2010-11, company had filed for 7 new patents and from the previous filings, 6 patents have been granted. The technology themes identified were Cloud Computing, Green IT, Social Computing, Information Management, Mobility, Collaboration and Open Source and resulted in creation of several new services like Cloud SI Services, Cloud Originator Services in areas of Mortgage Processing and Green Consulting. Wipro researches actively involved in Government committees to integrate Rupee sign into ICT environments. Source: Annual report.

TCS’ R&D organization is focused on creating intellectual capital for the Company and enabling innovation across the following three dimensions: Supporting the competitiveness of current business across industries and service lines; enabling the creation of new platforms for non-linear business growth; Exploring new areas and technologies for future new business opportunities. TCS has initiated ‘Research Scholar’ sponsorships to benefit research in the IT disciplines in Indian Academia. A number of innovation platforms, contests and awards were launched. The Company also hosted innovation forums in three continents and held over 40 innovation workshops and symposia. TCS’ researchers participated in more than 150 conferences and published close to 200 papers in prestigious journals. TCS increased its Intellectual Property Rights (IPR) significantly. 223 patents were filed in several countries in FY 2010-11. Until now, cumulatively, TCS has filed 448 patent applications of which 68 have been granted. In the current financial year 6 patents have been granted. Source: Annual report.

R&D departments need to further deliver more products and services and Vendors have to increase their R&D spend. They have to increase their collaborations and tie ups with other research and academic organizations and look to recruit more skilled and qualified professionals. Vendors have been trying to increase their R&D efforts and increase R&D contribution but they have not seen significant success. They have to look for ways to increase their R&D spending and also look for more contribution form the R&D department.