Using and Abusing Ecosystems | Part 1: Toyota and Mobile in Japan, Korea and China

(This column was written for the magazine “China Electronics Business”)

Years ago, while working at a large telecommunication operator, I was invited to a large yearly event for the company’s decision makers and attended a session on “ecosystems”. An expert was explaining how industry relationships were changing from clients-suppliers to “ecosystem”. At the end of his talk, he was told by an attendee that the company already had many partnerships in place and that, frankly, there did not seem to be a big difference with this “ecosystem” thing he was talking about. From what I gathered, the presenter failed to get the idea across.

Almost 10 years later, we hear this word frequently in tech circles, and we can observe quite directly the impact on the industry of who “got it” versus who did not. More importantly, it has expanded beyond telecom and become tremendously important to the web. I’ll take a few important examples to illustrate how some key companies understood this very well and have used it to their advantage.

What is an ecosystem?

The first image that comes to my mind when mentioning the term is the one of a forest, with grass, worms in the earth, mice and rabbits on the ground, snakes, and birds of prey such as the wedged-tailed eagle.
Generally, grass is considered a free resource or “externality”, worms get most of the abuse and birds of prey have a good time, but everybody live together and can thrive together if things keep balanced.

Obviously being a bird of prey is a better position, but there are only a few of those, whereas worms, mice and rabbits can be many. I found that this image works pretty well for most industries, the point being to understand who is who in the chain, especially if you discover you are a rabbit, a mouse or worse, a worm.

The legendary case: Toyota

Toyota came up with a system for continuous improvement, later adopted by General Electric under the name “6 sigma”. Toyota is today applying is system way beyond product development and you would not believe the extent to which they go with the system of “five why’s” to identify issues. Despite its commitment and still being the largest car maker in the world, it is pretty obvious the company somewhat lost track of the purpose of this system.

The Toyota system relies on a network of relationships with suppliers, where those are trained at Toyota facilities, benefit from Toyota’s research and are allowed to make profits in exchange for better integration and not being simply left to compete and destroy their margins. Of course, the master of this ecosystem is Toyota and its partners are much more dependent on the company that it is on them.

The best telecom case: NTT DoCoMo’s i-mode

Docomo designed a platform on which each partner could focus on its strength: making good phones for makers, making good services for content providers. Docomo takes a significant financial risk by committing to buy large volumes of handsets in exchange for makers following its specifications. Content providers followed Docomo’s guidelines and benefitted from a very generous revenue share.

As a result, several of them listed on stock exchanges for millions and sometimes billions. Some went on to acquire other companies in Japan and overseas. Docomo changed little its model over the past 10 years, which means partners were standing on reasonably solid ground. Whether Apple did find inspiration in this model to create the iPhone platform and business model is left to speculation, but the similarities are striking.

Korea’s mobile industry case

Korea found inspiration in Docomo’s model for sure. However, their command-and-control attitude and lack of efforts in bringing down data prices created a market where most successful mobile content providers are… subsidiaries of operators! The top gaming companies have been stagnant for years. Maybe the introduction of iPhone and other platforms will change the balance of power?

China’s mobile industry case

Again, inspiration was found in Japan. Again, the model was taken to a different direction. Generous in appearance, China Mobile left content providers battle to grow the market, while taking increasing shares in sales. It also regularly cleaned up the market from abuse, after having taken its share, letting content providers take the blame. More, it launched its own services, sometimes competing directly with its “partners” and of course, wiping them out in the same move.

In effect, China Mobile used its ecosystem as free R&D, financed by foreign venture capital and the sweat of entrepreneurs. The fact that the ranking on the operator’s mobile service portal was critical and utterly opaque did not create stable businesses. Most companies who could find an alternative business such as Netease, Sina, Sohu and Tencent gave up on mobile as a reliable revenue source.

– Part 2 next week!
@benjaminjoffe

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