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Thank You Skyhook, Now It’s Mine. Sincerely Apple and Google

Today both Google and Apple were asked to come before the US Senate judiciary subcommittee regarding a hearing on privacy, technology and the law. You can read TUAW's assessment as well as view a video of the opening statement by Senator Al Franken from today's hearings here.

Tracking Wi-Fi Stations
At the core, Android and iPhone devices have been tracking the locations of Wi-Fi signals. This is important because it allows the phone to know where you are.  Simplified, there are three main ways a phone can locate you: satellites,  cell towers and wi-fi signals.  Using triangulation algorithms, the phone calculates your position based any of these three methods.  However, there are draw-backs to both satellites and cell-towers. Satellites take forever and rarely work in urban situations where the signals gets bounced around. Cell towers are great for approximate location. It's through wi-fi signals that phones can pinpoint the location under 100 feet.

However for Wi-Fi tracking to work, the phone needs to be know the location of the Wi-Fi signal it picks up. Additionally, the map of these Wi-Fi stations are constantly changing as individuals set up, move, or take down these routers.  While Google and Apple have been getting a lot of heat, Boson start-up Skyhook pioneered the technology.  In 2008, Apple decided to use Skyhook technology in its iPod and iPod Touch.

Thanks for showing me how its done

It wasn't long before both Google and Apple, who had originally licensed the technology and the data realized that they had the ability to build their own data layer. And thus, they did.  Skyhook is now fighting to stay ahead of the game and become the technology source for wi-fi enabled locationing. Recently Skyhook has sued Google for both patent infringement as well Google exerting its market influence on Motorola to switch providers. You can read the filing.

What should Skyhook do?
The case got me thinking, if I were the proverbial David being crowded out by Goliaths the likes of Google and Apple, what would I do?

Here's my breakdown:

Shifting Winds

Skyhook needs to fight or  at the mercy of platform providers (like Google and Apple), Skyhook requires a strategy that centers on the results of current suits and takes advantage of the shifting regulatory/political environment.  Beyond the current two suits Skyhook has with Google, recent shifts in both the consumer and political meme focusing on privacy and smartphone data collection may serve as an opportunity for Skyhook.[i] Indeed, we should watch carefully the questions and answers from both Apple and Google when they appear in front of Congress on May 10^th.  Because the results of these two events have yet to play themselves out, I posit that Skyhook’s strategy should be played out in two stages.

Critiques on Competitive Advantages

IP/Regulation: Skyhook has a defensible patent portfolio around the technology. As mentioned previously, current political and consumer sentiment may also play a role in upcoming legislation. Skyhook needs to continually battle in courts and win. IfSkyhook can win core patent disputes, it has a defensible IP position. Then it can choose to either follow the route of ARM and become a friendly licensee or go aggressive and resemble the NTP/RIMM relationship.[ii]

Lastly, there is regulation risk. Should the US government decide to further open up the accuracy of GPS or if other foreign countries decide to offer higher grade GPS, it may lessen the importance of Wi-Fi locationing.

Brand: While Skyhook does not have a current brand advantage, the recent focus on smartphone and PND privacy on Google, Apple, Microsoft, and TomTom may be become an advantage of Skyhook.[iii]Skyhook needs to get in front of the issue and position itself as an independent third-party provider that puts the upmost care on protecting consumer privacy.  Indeed, its method of data collection sends point data, as opposed to anonymized user data.[iv]

Economies of Scale: Companies benefit from economies of scale. But the location dataset is constantly shifting. Because Google could no longer collect WiFi data from its streetview cars, it needs to find a way to build the database. [v] It remains to see what restrictions will be put on Google and Apple after the May 10^th hearing.[vi]

Given the decaying nature of WiFi location maps, no current player has a sustainable advantage. This is a prime example of the Red Queen Effect.  A company needs to have a critical mass of distributed data collectors to build this competitive advantage. It can either build it itself or find a method of leveraging the crowd.  The latter is the more cost-efficient method, but companies must be careful due to increasing focus on privacy concerns.

Network Effects: While Skyhook does not have network effects, (as evidenced by both Apple and Google shifting), I question whether Apple or Google currently have it as well.

Employ a Horizontal Strategy where Reach is Paramount

A horizontal strategy is the best chance that Skyhook has to survive. Given its limited access to capital,Skyhook does not have the financial resources to deploy vertically down the value chain. Unlike Qualcomm, Skyhook does not have a secondary business for the company to go vertical only to become a horizontal player. Skyhook operates lean and under very tight cost controls.[vii] Given the length of the current litigation between itself and Google, its resources are even more constrained.  However, givenSkyhook’s patent portfolio, it may be able to exert some pressure if it can win favorable ruling in its current lawsuits.

The Race to Own the Database of Current Location Data

Skyhook occupies two portions of the value chain: location data and the location optimizing software.  In going horizontal, Skyhook needs to determine whether or not it wants to occupy both or just one piece. Location data is viewed as a critical asset for all the players involved and this is what all the companies will be fighting over. This is because owning the data adds the contextual understanding of the end-user. The ability to serve location-based advertising that understands that a user spends his time at a driving range once a week is projected to become a multi-billion dollar business.[viii] Additionally, providing precise location data is more useful to companies that approximate (e.g. Foursquare proximity check-ins versus Shopkick in store walk-ins) for companies business models.

Skyhook’s many rivals want to own this data. Skyhook’s rivals can be divided into four parts of the value chain:

Horizontal Strategy > Prioritizing Potential Partners

With a horizontal strategy Skyhook should prioritize its strategic partners based on partners that can provide the most scale. For each vertical (e.g mobile phones, digital cameras, PCs, ereaders, portable gaming devices,[ix]etc), Skyhook should approach by: OS, Device, and then Apps.

1. OS companies like Microsoft, Google, and Apple provide the greatest opportunity. However, it is acknowledged that over time, companies will want to build their own location databases.
2. Component/Device Manufacturers: Provide the second most scale, while also allowing for the possibility of integrating its software with either the device or the processors.
3. Applications: The application for wireless devices follows an immense long-tail. Focusing on larger apps like it current partners is desirable, but a bottoms-up approach will drain Skyhook’s already thin capital reserves.  Instead of inking deals with developers,Skyhook should open up its APIs to encourage developers to use its location platform.

A solid API strategy will enable Skyhook to grow it’s developer base beyond the initial 200 developers. [x] Skyhook’s API strategy should also focus on applications that require precise information. For example Augmented Reality will become an increasingly ubiquitous technology.

Two Steps: Win Patent, Win Race for Map Database

To date, Skyhook has filed two suits against Google. The first claims patent infringement. The second alleges “unfair and intentional interference with its contractual and business relationships.” The first claim of patent infringement will be critical to Skyhook’s long-term survival. This is because if the ruling is favorable, it can demand and gain licensing from anyone using location (other than GPS) on mobile devices to deliver information, content. [xi] The second claim will provide a payout that will help sustain Skyhook.

Beyond winning litigation, Skyhook has to maintain the largest DB for Map Data. Winning litigation will make it facilitate its strategy as it can employ a licensing strategy and provide value-added services. However, should it win and decide to trade rates much like Qualcomm, it is possible that larger firms with its access to capital may seek to forge methods to cut off Skyhook.  Should larger firms succeed,Skyhook will most likely move to become a patent holding company like NTP.  If it loses litigation, it will most likely lose the data DB game and become an acquisition target.

The 1-2-3s of Skyhook:

1.  Go Horizontal

·         Mobile, Devices, PCs, anything that connects to Wifi

2.  Build a Brand (Unlike Apple/Google)

·         Build on privacy concerns and differentiate

·         Leverage brand to get Congress to get Apple/Google to go to a 3^rd party source of location data

3.  Defend IP and Win Map DB:

Nokia Corp. (NOK) has licensed five NTP Inc. patents that are at the center of a dispute between NTP and Research In Motion Ltd. (RIMM).

In a four-line press release issued Monday afternoon, NTP said it entered into a license agreement with Nokia under U.S. patents 5,436,960, 5,625,670, 5,819,172, 6,067,451 and 6,317,592 and related issued patents and pending patent applications. The license covers all Nokia products and equipment, but excludes network communication services, the release said.

Last year, a Virginia court ruled that Research In Motion, maker of the BlackBerry wireless handheld device, had infringed on the five NTP patents. The court ordered Research In Motion to pay NTP $53 million, as well as an ongoing 8.55% royalty on the bulk of BlackBerry sales in North America. The court also ordered an injunction on BlackBerry sales in North America but immediately stayed the injunction pending an appeal.