Two decades ago, Japanese electronics giant Sony was ascendant. Not only were its products everywhere—televisions, video game consoles, cameras, headphones, watches—but owning a Sony device was a status symbol. In 2015, however, the company is a shell of its former self. Though it still had revenue last year of $68 billion (U.S.), its market share in both TVs and smartphones has dropped by over half in the past six years. It only managed to eke out a profit last quarter because it supplies parts for Apple's iPhone—a competitor to Sony's own Xperia line of handsets.
Conventional wisdom states that Sony fell because, as the digital era arose, it simply didn't understand software; using a Sony MP3 player or DVD player was for years an exercise in frustration. Yet, software is only part of the equation. Sony shrank so radically because it couldn't produce a digital ecosystem—that is, a mix of devices, software and services that work seamlessly together. By the time Sony started to get it right, it was too late. Hundreds of millions of users were already loyal to ecosystems created by Apple and Google.
It's a struggle more companies will face in the coming years—if they aren't already. Once upon a time, there was a clear line separating digital from analog. A company like Sony only had to worry about how each of its products performed in isolation. Today, everything from cars to kettles relies on software—and an online network—to function. Call it the ecosystem effect: Suddenly, companies that make washing machines have to think about which smartphones their potential customers are carrying around.
As is often true at this point in history, Apple is instructive. It once focused exclusively on what were essentially just computers of different sizes—iMacs, iPads, iPhones, iPods. But over the past two years, it has been expanding further afield. It has made forays into fashion, with the Watch, and home automation, with its HomeKit platform, which turns Apple devices into controllers for thermostats, smart door locks and more. It has even made significant investments in the auto sector—for now, just the software for navigation and media in cars, but it's only a matter of time before it releases its own electric vehicle.
If these were all disconnected products, this might not have companies like GE, LG and General Motors running scared. But they're not disconnected products. All of Apple's devices run on varying versions of its own software, which means they all work best together, with an iPhone or iPad as the control centre. The beauty of the ecosystem effect, from Apple's point of view, is that it's sticky: Once a customer invests in an appliance or auto navigation system that works with her smartphone, she's much more likely to buy products that function effortlessly with the same system. Understandably, then, Apple will continue to create more and more varied products in the same line.
Of course, this new connected world still holds loads of possibilities—as long as you're willing to hook your products into these existing ecosystems. There are pitfalls, however. Consider Samsung: Not only has it raked in billions selling smartphones and tablets, it also sells everything from vacuum cleaners to televisions to refrigerators. It seems perfectly poised to succeed as it transitions to the world of ecosystems. Yet, its tent-pole smartphones are reliant on Google's Android software; adding in new capabilities that would allow Samsung to connect all its products digitally means waiting on Google to upgrade its operating system to include those features. Recognizing the long-term implications, Samsung has begun deploying its own software, called Tizen, which it has started to embed in some of its TVs and phones in the hopes of kick-starting its own interlinked ecosystem.
Unfortunately for Samsung, and the many companies that once had no reason to think about digital, the success of Apple and Google make that change an uphill battle. When everything runs on software, it is the digital interface that is primary—and Google's Android and Apple's iOS control nearly 85% of the computing market. Even Microsoft—a company that once held a near monopoly, and has both enormous cash reserves and deep software expertise—has found no way to chip away at the Apple/Google duopoly. Late to the shift toward the ecosystem, it sits at 14% of the computing market, a disparity that is likely to get worse, not better.
In theory, digital and software offer limitless choice and opportunity. In actuality, the ecosystem effect is subject to a distinct first-mover advantage: Once entrenched, those with comprehensive ecosystems become increasingly difficult to dislodge. Now, companies of all stripes are stuck dealing with the implications, and they really have just two options: build their own ecosystem and try to challenge the established players; or rely on someone else's and be subject to what may be competing interests. Unfortunately, neither option is particularly palatable.