Select semiconductor companies have taken the standard open innovation playbook and are evolving and shape-shifting critical elements in order to lead innovation in mobile—with a specific emphasis on five tactics that seem to have paid off. Turning our attention to prominent new markets in sectors undergoing rapid transition, we have seen growth opportunities flourish for those able to compete with innovative mobile business models.
Read the article from which this feature was excerpted, Rising tide: Exploring pathways to growth in the mobile semiconductor industry.
For many who have succeeded in capturing value from the onslaught of disruptive mobile technology, stories abound of entrepreneurial dare combined with strategic nous to fend off the waves of competing firms, old and new. Others it seems are just happy to be in the right place at the right time to exploit emerging markets awakened to the possibilities the mobile web affords. But dig beneath the surface of some of the sector’s best performing companies and recognizable patterns of behavior surrounding their approach to innovation and growth begin to emerge.
Indeed, one segment of the industry notable for perhaps flying under the radar when it comes to high-profile mobile growth strategies is the semiconductor sector. Traditionally known for pursuing innovation via Moore’s law to the nth degree and shrinking chipsets onto expanding silicon wafers, the industry’s leaders have quietly positioned themselves at the center of mobile technology innovation across multiple emerging markets. Look closer still and some of the best-known chip companies making significant moves in mobile are connected by a common thread—the use of open innovation (OI) strategies and tactics to gain leadership in new mobile markets.
In this article we explore how and where select semiconductor companies have taken the standard OI playbook and have been able to evolve and shape-shift critical elements in order to lead innovation in mobile. Specifically, we focus on prominent new markets in sectors undergoing rapid transition, where growth opportunities flourish for those able to compete with innovative mobile business models. But first a quick glance at some of the industry’s headline growth trends sets the scene.
Ask most executives tasked with developing new business models with mobile tech at the core and they’ll probably agree it’s a tremendous opportunity, but one that’s increasingly difficult to realize. At least in part this is because the once traditionally predictable wireless sector finds itself constantly disrupted in what Dartmouth professor Richard D’Aveni once described as a period of sustained hypercompetition.† Nevertheless, as the saying goes, out of adversity comes opportunity, and now more than ever consumer and enterprise markets are demanding mobile products and solutions that, in turn, fuel the fire for innovation.
In case you haven’t heard, mobile data traffic is through the roof. Earlier this year, Cisco’s annual Visual Networking Index predicts mobile and Internet data traffic to increase 13-fold from 2012 levels over a five-year period. Even more significantly, the index forecasts total mobile traffic to increase at a CAGR of 66 percent during 2012–17 (see figure 1). In the United States alone, according to industry wireless association CTIA, wireless traffic doubled, with 104 percent year-over-year growth between 2011 and 2012, as the base of mobile subscribers grew (see figure 2). And let’s not forget emerging markets across Eastern Europe, the Middle East, Africa, Asia-Pacific, and Latin America, which are poised to eventually outgrow the developed world in terms of mobile traffic growth by 2016.1
Across the technology, media, and telecoms (TMT) sectors, the magnitude of these forecasts should not be underestimated. The pace of growth in mobile data traffic is staggering, reflecting how society has embraced mobile wireless technology in ways that were unthinkable a mere five years ago. As Silicon Valley venture capitalist Mary Meeker points out,2 innovation in mobile technology and wireless connectivity has rapidly touched upon all facets of life and “reimagined” everything from personal computing, printed media, news, and information to music, video, home entertainment, and art, to eating, drinking, health care, banking, and commerce. The list is seemingly endless. Mobile technology has undoubtedly changed how we live, work, socialize, and collaborate. And yet, in many ways, we’ve barely scratched the surface. With the advent of ubiquitous wireless access in cities across the developed and developing world set to spur waves of democratized digital populations, the possibility that mobile technology will transcend previous technological shifts in societal impact is very real indeed.
In economic terms, the emergence of the 4G wireless era has profound consequences for firms competing across the TMT sectors. Perhaps more so than previous network standards, fourth-generation network technology in the form of the LTE (long term evolution) standard is poised to boost mobile innovation and adoption and fuel the upward growth of mobile data traffic to new heights.3 On paper, LTE provides a jump in network speeds and bandwidth capability, ushering in that new wave of mobile ubiquity, which has seen 4G adoption in the United States lead the way, commanding roughly 64 percent of worldwide LTE subscribership. Analyst estimates suggest LTE services will generate more than $11 billion in service revenue in the United States by 20154 with global LTE subscribers likely to exceed 1 billion by 2016.5 That’s a whole lot of connectivity going on.
These days smartphones are ubiquitous, blurring the boundaries between the worlds of enterprise, commerce, and high-street consumers. From the latest superphones, such as the iPhone and Galaxy models, to lower-tech devices (not-so-smart-phones, if you will) flooding emerging markets and enabling greater access to mobile computing for the masses, their popularity has never been higher. Unsurprisingly, this device category is easily the most significant growth driver for the mobile semiconductor sector.
Indeed, a comparison with the traditionally robust PC semiconductor market illustrates just how quickly smartphone and tablet adoption has risen over the last 18 months, with an even greater uptick expected in the next three to five years. Much of this demand will emerge from basic and low-cost phones in the emerging markets as cost-conscious consumers seek out increasingly affordable devices. As mobile technology development accelerates, a trickle-down effect is prevalent in many markets, helping spur growth in low-end product categories across developing economies. For example, in regional markets such as China, technology reuse has never been higher and is set to spike further with a reference design approach in semiconductor chipset utilization becoming common among vendors. This will have a lasting impact, and analysts expect China’s connected device market, which encompasses a broad range of consumer electronic devices in addition to mobile devices, will experience six-fold growth by 2020, representing some $700 billion in potential revenue—twice the current semiconductor market.6
Analyst estimates suggest LTE services will generate more than $11 billion in service revenue in the United States by 2015 with global LTE subscribers likely to exceed 1 billion by 2016. That’s a whole lot of connectivity going on.
And let’s not forget tablets. Possibly the biggest shift in mobile device ownership over the last 12 months has been driven by a voracious consumer demand for tablets, which have become the mobile device du jour across an increasingly wide demographic. Such is the extent of the demand that some analysts predict up to 44 percent of consumers worldwide will own tablets by mid-2013, with 25 percent being first-time owners.7 In the United States this trend is particularly pronounced, with tablet ownership thought to be in the region of 25 percent in 2012, compared with just 3 percent in 2010.8 Moreover, a recent study by Deloitte LLP* predicted that almost 50 percent of US consumers will likely own tablets by the end of 2013, with 22 percent expected to be first-time buyers.9
In the short term, a victim of this shift toward ultra-mobile computing platforms could be the market for desktop personal computers (PCs). As the mobile web experience increasingly matches, and in some cases exceeds, the desktop PC web experience, a significant amount of IP and Internet traffic is originating from non-PC devices. As tablets such as Apple’s iPad become content creation devices, consumer demand for PCs is expected to plateau and remain sluggish in the immediate short term. At the same time, new tablet design form factors and innovative mobile software development will spur consumer adoption and help address email, social networking, web browsing, and mobility requirements at relatively lower price points compared to PCs. Again the numbers don’t lie—468 million tablets are expected to be shipped worldwide by 2017, and subsequent revenue is expected to increase from $40.8 billion in 2012 to $93.2 billion in 2017 (see figures 3a and 3b). At the regional level, the United States will primarily continue to lead in tablet shipments through 2017.10
Mobile growth opportunities for semiconductor companies are not just restricted to smartphones and tablets. Cast the net wide, beyond the wireless sector, and the impact that 4G will have on nontraditional wireless industries such as retail, health care, energy, and automotive is expected to be even more pronounced. Here, mobile device and software innovation—focused on enhanced wireless connectivity powered by machine-to-machine (M2M) technologies—is driving business model innovation. The outcome is a flood of new mobile products and services in industries adopting mobile technology at their core. In economic terms, the net effect of this technological shift is significantly positive across multiple facets of the mobile industry’s value chain, from both the supply and demand sides. Health care, commerce, retail, and energy are all industries considered to benefit the most from the emergence of 4G broadband technology.11 Devices integrated by M2M wireless technology are enabling new gateways to connectivity and propelling mobile revenue growth in the process. As a result, worldwide M2M interconnected devices are on a steady upward march that is expected to surge 10-fold to a global total of 12.5 billion devices by 2020.12 M2M traffic forecasts show a similar trajectory with traffic predicted to grow 24-fold during the period 2012–2017.13 Revenue from M2M services spanning a wide range of industry vertical applications, including telematics, health monitoring, smart buildings and security, smart metering, retail point-of-sale, and retail banking, is predicted to reach $35 billion by 2016.14
To chip companies, all of this is manna from heaven. With new mobile device adoption set to proliferate in many industries, leaders will be well placed to drive product innovation across a variety of verticals. The question is just how, why, what, and where can they do so?
The keys to unlocking mobile growth—democratize or die!
For many of the leading semiconductor companies making a play in mobile, tactics for exploiting growth opportunities vary, unsurprisingly, according to the specific industry, product technology, and market offering. However, our research did reveal a number of common threads between the core components of the leading companies’ innovation strategies. Specifically, it was clear that elements from the OI playbook played a key role in achieving breakthrough innovation in each company analyzed. This enabled democratized pathways to growth to emerge, allowing them to look beyond the four walls of the organization to secure new knowledge and new partners for collaboration. In doing so, each of the company’s boundaries become permeable, and the process for developing innovation becomes increasingly distributed and dispersed across geographies.
“Not all the smart people work for us. We need to work with smart people inside and outside our company.” —Henry Chesbrough, 2003
A decade has passed since Henry Chesbrough, the Berkeley professor often considered the leading academic on OI, laid the foundations for what many think is dominant model in innovation strategy today. Since then, OI has allowed many companies from an increasingly wide variety of industries the chance to explore the advantages of cooperation and collaboration and kick-start their previously stagnant innovation process. Even more significant are the risks associated with not having some semblance of an OI strategy active, with some research indicating that firms that do not enter into collaborative knowledge sharing can, as a consequence, expect to shrink their knowledge base over the long term, lose their ability to partner with other organizations, and ultimately stymie their innovation capability. All of which is bad news for those seeking growth in new mobile markets.
Nevertheless, as more companies shift from the traditional closed model of innovation and embrace a more open approach, the days where all research and development was kept in-house are gone. No longer do firms need to rely on the old ways of using internal resources to closely guard the development of intellectual property until new products or services are launched in the market. OI is the antithesis of this approach, helping companies look beyond their boundaries to seek and utilize flows of knowledge, both inbound and outbound, to accelerate internal innovation and expand markets for external innovation.15And as the model becomes more widely used, recent management research on the topic has primarily focused on understanding the “mechanics” of execution.16
Consequently, approaches to making OI work tend to fall into three broad process categories:
The most common approach to implement OI is through a series of activities that can be characterized as outside-in processes. Here, the objective is to improve the company’s knowledge base primarily to stimulate and enhance the process of innovation. This is usually done by integrating and interacting with external sources of new knowledge, such as those in the immediate competitive landscape including suppliers, clients, customers, and competitors. Other external sources can also include research institutes and those noncustomers and suppliers from completely different industries. It is here that the importance of developing an astute innovation networking strategy is paramount, with the ability to expand networks into supporting ecosystems that integrate disparate communities now recognized as a core skill.
The inside-out approach to OI concerns the routes by which firms can capture value by bringing ideas to the market, trading in intellectual property, and transferring technologies to the external market for further development. Those companies that emphasize this process as their core OI approach primarily look to shift the exploitation of their intellectual property beyond the firm’s boundaries by licensing mechanisms often used to spread technology and ideas to other companies and other industries. Value is often generated and captured using IP licensing royalty fees, agreements with other firms in joint ventures, and with the development of spin-off companies allowing firms utilizing these tactics to collectively generate more overall value from innovation. The focus on new business model innovation in new markets via corporate venturing is also an outlet for larger multinational companies who have the resources to pursue such strategies.
This OI process focuses on combining aspects of the outside-in approach to secure new knowledge, with tactics from the inside-out process to bring ideas to the market. Here, cocreation between usually complementary partners via network alliances, joint ventures, and other vehicles for cooperation is combined with commercialization tactics to develop and exploit innovation. Many of the approaches used in this process stem from lessons learned in areas such as open source software development where communities of self-organizing peers evolve to enable development of products, which also includes integrating early adopters of technology (also known as lead users), consumers, and universities and research institutes. Partnering with innovation intermediaries such as Innocentive and crowdsourcing solutions using digital platforms are also examples of deploying a hybrid process in an OI strategy. They are proof that developments in social media technologies are enabling companies to interact with an unprecedented variety of partners, drawing them into the heart of their OI strategies in all stages of design, development, and adoption in the market.
Our study on semiconductor companies in mobile17 synthesized these three process categories into a single framework for analysis, which then acted as a “lens” on the tactics being used for innovation across a wide range of industries.
As consumer and enterprise demand increases for mobile products and services, a few forward-looking semiconductor companies are set to reap economic benefits. Our research points to influential positions being established at the heart of emerging mobile growth platforms and ecosystems in sectors where mobile and wireless technology adoption is rising, such as the automotive, health care, and consumer electronics industries.
The automotive industry has made great strides over the last three years to rapidly adopt wireless technology across a range of consumer and enterprise products and services. With in-vehicle electronics growing in complexity and demand, two categories for semiconductor growth currently stand out: in-vehicle infotainment (IVI) and telematics/connectivity systems. By far the biggest automotive connectivity growth channel, the IVI market is estimated to reach $41 billion by 2016 (see figure 4).18 Propelled by a surge in integration of infotainment and wireless connectivity solutions that will power the likes of next-generation navigation systems, advanced premium audio, fuel efficiency, and enhanced safety functionality, this section of the market is expected to provide chipmakers with opportunities to significantly expand their embedded market footprint. Similarly, chip companies are also finding strong growth opportunities in the telematics category, where connectivity systems to assist vehicle diagnostics for maintenance, fleet vehicle management, and roadside assistance are converging with advanced driver insurance systems in products such as pay-as-you-go driver insurance and driver-based insurance mapping.
Those making a play in these areas using OI tactics include Intel, which is using its Atom processor to develop next-generation IVI platforms, enabling codevelopment partnering to take place with the likes of Hyundai Motor Corp., Kia Motors, Toyota, and Nissan. Intel’s strategy is to grow its leading position at the core of an ecosystem that incorporates multimedia and voice technology companies, IVI system manufacturers, mobile software developers, and car manufacturers.19 As the company plays catch-up in mobile, this initiative is indicative of its goal to become competitive in the embedded wireless market via the Atom platform, which promises lower power consumption and ease of product functionality, such as advanced video streaming, navigation, and gaming capabilities. Along the way, Intel is also leveraging key technology in-licensing deals with partners such as Wind River Systems and expanding its collaborative shared product architecture programs to improve knowledge sharing and transparency to partners in the innovation process.
Broadcom is another company beginning to make headway in automotive, this time focused on connectivity solutions as part of the company’s plan to expand its embedded wireless technology portfolio. Initial growth strategies are centered on the firm’s BroadR-Reach Ethernet-based connectivity technology, which enables in-vehicle systems and sensors while improving speeds up to 100 Mbps and reducing traditional cabling costs and weight. Innovation tactics are once again focused on partnering and community-building with the likes of Hyundai Motors working with Broadcom to deploy Ethernet technology in advanced driver-assist, telematics, and infotainment systems. Broadcom is also one of the founding members of the One Pair Ethernet (OPEN) Alliance group, which was organized in 2011 to promote the wide adoption of Ethernet-based networks as a standard in automotive applications. Other members of the 100+ group include major car companies such as BMW, Hyundai, Jaguar, GM, and Honda, all of whom are partnering to develop new Ethernet-based automotive connectivity solutions with chip providers.20 New solutions delivered to the market include the Broadcom-Freescale Semiconductor-OmniVision Technologies’ jointly developed 360-degree surround view parking assistance system, which was notable for its open shared architecture process. Building on its success in open collaborative product development, Broadcom has also been aggressive in using its noted M&A capability to bring in-house new technology development that helps the firm enter new mobile growth markets, such as NFC mobile payments, and expand its intellectual property portfolio, generating sizeable revenue along the way.
The US health care sector is witnessing increased adoption of mobile and wireless technology, with the global mobile health (mHealth) market forecast to be worth $11.8 billion by 2018.21 Within this fast-growing, embedded segment, the consumer medical device market is expected to be a leading connectivity growth opportunity for semiconductor companies.
Key drivers of this expected growth are the recent health care reforms in the United States, such as the Affordable Care Act and the Health Insurance Portability and Accountability Act, which are aimed at reducing health care costs, improving care quality, and increasing general public access to health care. These reforms, together with an aging population, are driving the need to reduce the cost of treatment, thus fueling demand for remote patient treatment and monitoring. Within this niche market, device OEMs are utilizing semiconductor processor platforms to enable advanced functionality in areas such as diagnostics and therapy. This is helping fuel the US wireless health monitoring device industry, which has doubled in the past four years from a value of $7.1 billion (2010) and is estimated to grow to $22.2 billion in 2015.22
Semiconductor companies making plays in this area include Qualcomm, which through its subsidiary Qualcomm Life, has launched the 2net platform, a cloud-based platform designed to provide wireless connectivity and data management services for chronic disease management and improve the sharing of medical information. More than 180 partners and collaborators have integrated or are considering integration with the 2net platform. For Qualcomm, this is an example of the company’s approach to becoming a platform leader in mobile and wireless using elements of the OI playbook—in this instance network and community building. Already leading the mobile applications processor market with the hugely successful Snapdragon chipset,23 which powers many of today’s smartphones and tablets, the company has successfully leveraged a number of tactics designed to exploit collaborative innovation. For example, the firm’s prominent use of acquisitions and in-licensing technology, most notably in the form of the ARM processor architecture at the core of the Snapdragon chipset, has allowed it to build a series of resilient technology platforms across multiple markets and engage third parties as part of a collaborative innovation strategy. Partnering with firms to assist them in developing new mobile software and in hardware innovation allows the firm to build networks and lead new ecosystems that complement and enhance its proprietary core technologies.
Other vehicles used to establish collaborative innovation networks and allow codevelopment on shared product architectures include Qualcomm’s venture capital group, which acts as a conduit to bringing in and spinning out new ideas to the market. The Qualcomm Life Fund is part of this group, focused on investing in companies active in areas such as chronic disease management, remote diagnosis, and health informatics and analytics, all of which will help accelerate adoption of the 2net platform. The firm also established the Qualcomm Innovation Center in 2009 to promote open source software development in conjunction with developing proprietary Qualcomm technologies. Once again, acquiring external technology and establishing innovation networks, this time in the open source community, has become a key element of the process that has led to a series of successful initiatives in areas such as smart home technology. 24
The impact of Smart Home‡ technology adoption is picking up speed, and semiconductor companies are well placed to capitalize. Recent analyst projections suggest global smart home revenues are estimated to reach $72 billion by 2017 with new ecosystems focusing on the development of systems and devices for smart home entertainment, computing, monitoring and control, and even health.25 Market trends to watch in this area include the emergence of app-based home automation solutions; adoption of multiple, and seamless, connectivity options within the home; and a general shift in consumer discrete content viewing to content-as-a-service model. All of these trends will provide semiconductor companies opportunities to develop and utilize new platform chip technologies in a multitude of home connectivity solutions and consumer devices.
Companies already making inroads in this market include Samsung, which has introduced AllShare, a digital content sharing platform for smart home use. The firm, which has a well-established semiconductor operation feeding a variety of its consumer electronic markets, has also launched Smart View, a software application that links Samsung’s Smart TV with its own brand of mobile devices, enabling users to stream live TV and other content. Also part of the firm’s platform strategy is a home energy management solution that integrates smart appliances, smart TVs, thermostats, mobile devices, solar panels, and smart meters. Tactics used by Samsung to boost innovation capability in this area and beyond increasingly rely on elements of the OI playbook. The company invests heavily in research and development across all business units—some $22 billion in 2012 alone—and has operated a robust OI program for a number of years. The primary aim is to network its stand-alone research centers with partners in industry and academia through initiatives such as the global research outreach program, an annual call for research proposals from universities, with Samsung then sponsoring and collaborating on the winning ideas.26 Recent moves to expand the outreach strategy include the soon-to-be-open OI and venture capital centers in Silicon Valley and New York City being built to enhance open outreach to the technology, mobile, and media communities and keep the firm ahead in mobile software and hardware innovation.
At the broadest level, our research confirms that leading semiconductor companies are utilizing multiple tactics associated with OI to eke out dominant positions in the mobile ecosystem. By moving the focus on growth beyond the confines of their traditional markets, companies such as Qualcomm and Samsung are successfully implementing platform leadership strategies that incorporate key elements of the OI playbook.27 Specifically, our findings highlight wide implementation of the three pillars of OI—namely, combinations of the outside-in, inside-out, and coupled processes—at the core of the OI strategy.
Dig deeper, and the common use of five tactics aligned to each core process becomes apparent in each instance where semiconductor mobile growth through OI is targeted. These tactics include: in-licensing technology through partnerships and acquisitions; enabling third-party codevelopment and complements by developing innovation networks and ecosystems; sharing product architecture control through open source development; enabling information transparency via open platform technologies; and out-licensing internal technology via venture capital mechanisms. When all of these elements are brought together and deployed as part of a systematic OI process, a company can expect to improve its growth capabilities and go some way in building a sustainable OI model.