December 13, 2004

Changing PC Industry Economics

How much did your cellphone cost you? What’s the average price of a handset? What’s the average operating margin for a carrier’s handset business?

The answers to those questions give you no clue whatever to the health of the handset industry. Why? Because the devices are sold to consumers as part of subscription calling plans, whose long term value is sufficient to drive some relatively crazy discounting in the carrier’s retail outlets (go check them out, now that carrier’s kiosks are popping up everywhere). The same handset from multiple carriers can range from free to $799. And as mobile data services increase in value (even if most folks over 30 don’t even know what a ringtone or game download is), the insanity (or sanity) at the checkout counter will only quicken.

And as I was saying on Steve’s Gillmor Gang, give it a year, I’ll make a big bet, you’re going to see the same thing begin to happen in the PC industry. Will the average selling price (ASP) of a PC continue to meander south? Yes. Unrelated to component cost. Will it go to free, like handsets? Absolutely. In exchange, consumers will sign up for network plans, DSL, cable, you name it. On PC’s, or more likely equivalent dedicated devices branded by carriers – just as in the handset industry, where carriers are increasingly deploying ‘branded’ handsets. It’s been a tad tougher on PC’s when they didn’t control the software load, but it’s just a matter of time.

This is the foundation of the pricing distortion that occurs when networks, time and value blend. It’s how Echostar and DirecTV subsidize satellite dishes, cable companies subsidize set top boxes, and how carriers sell handsets. Take out the network delivery part of the equation, it’s how magazines sell subscriptions (first 6 months free). The spot margin is less interesting than the number of subs, ARPU, churn – and longer term EBITDA. Terms the PC industry will learn to respect, it’s inevitable. Maybe not in the enterprise, where purchasing agents are fixed in their ways, but surely in the consumer marketplace, where “NO MONEY DOWN!” is popular signage.

So what’s happening to the PC industry? It’s moving from the old world, in which one buys a PC and cares a great deal about its comparitive hardware features (does it have a DVD player?), to one in which the hardware is nearly identical, and the value’s moved to services available through the device. Over the network. Battery life matters more than processor speed. Size of display more than disk. Access to Yahoo! Personals matters more than all of the above.

This echoes what I wrote recently in my Business Standard column.

Cisco’s 20 years

News.com looks back and ahead:

To chase new growth, however, Cisco has been progressively forced to forage outside the corporate networking market it dominates, into the highly competitive carrier market and the risky, lower margin consumer market.

Over the next few years, large telephone companies around the world are expected to build out huge IP networks to support broadband and new services like IP telephony and IP video. The market is expected to surge about 20 percent a year, nearly twice that of the corporate market, which is where Cisco has traditionally made its money.

Analysts have said that this new market offers Cisco one of its best chances to meet growth targets of 10 percent to 15 percent a year over the next three years–projections that the company reiterated this week at its annual analysts conference on its sprawling San Jose, Calif., campus.

“The carrier market is key for Cisco,” said Dave Passmore, an analyst with the Burton Group. “There’s tremendous upside here. This is the only market that they don’t have to dominate, and they can still find some significant growth.”

n its effort to find the “next big thing,” Cisco has already earmarked a separate category of products it calls the Advanced Technology Group. So far, Cisco has identified six new technologies for this group–security, IP telephony, wireless, storage, optical and home networking–each of which it hopes to grow into a $1 billion business.

In aggregate, these technologies make up a relatively small proportion of Cisco’s revenues. But they’re growing. In the fourth quarter of fiscal 2004, Advanced Technologies made up about 16 percent of the company’s overall revenue, up from 5 percent in 2003. Cisco isn’t stopping with these six. Chambers says he hopes to add at least another six.

How to Build A Better PC

WSJ has an opinion by David Gelernter in the context of IBM’s decision to sell its PC business:

What’s wrong with today’s PC? Plenty. All sorts of functions that ought to be built-in are available only as add-ons or not at all.

Like many people, I have several PCs in my life — and I constantly need to ask such ridiculous questions as, “Where did I leave the latest version of that file? By what clumsy method should I move it from where it is to where it’s needed?” Such questions are like asking “Where did I leave the starter crank for my Huppmobile?” If you have to ask, your (formerly) hot-shot machine is ready for the folk-art museum.

IBM might have done well selling PCs with built-in “transparent information sharing.” As soon as you connected such a machine to the Internet, all your electronic documents would immediately be available — no matter where you created or last worked on them. If all your computers had transparent information-sharing, you could start composing an e-mail at work, touch it up during your drive home (using a — theoretical — in-car, audio-interface IBM PC) and finish it up on a laptop in your backyard. Lots of businesses and people would have shelled out for such PCs.

Many old and decrepit PCs would be replaced tomorrow if bringing new PCs up to speed weren’t such a colossal nuisance. IBM PCs with transparent information-sharing would have made that problem disappear. Connect a new machine to the Internet and all your electronic information would have materialized automatically.

Business Lessons

Seattle Post-Intelligence writes about a talk by Jeff Raikes of Microsoft:

It’s often better to cannibalize your own business than to give someone else an opportunity to do it.

In some situations, your biggest competition is yourself.

One of the best ways to compete is to bet big on a “paradigm shift.”

When you dominate a market and you’re looking for ways to grow, adjust your thinking to enlarge the potential market you’re pursuing.

Keep your mind open to unexpected opportunity.

Services on Mobiles

The New York Times writes:

Today very few people are using so-called third-generation mobile services, or smart phones, which allow users to browse the Internet and watch videos. But most cellphones sold these days have color screens and the ability to receive picture messages. So media companies are reinventing quaint old formulas with the aim of reaching youthful customers.

“Are people going to read ‘War and Peace’ on their telephones?” asked David Harper, whose company, Wireless Ink, in Cold Spring, N.Y., offers Web users cellphone-size literature on such weighty themes as the zombie apocalypse. “The answer is probably no. Right now the content on mobile devices is almost like early television. What they did then was to sit down and do a radio broadcast for the television screen. But there was a picture. Our mission now is to get feedback.”

TECH TALK: Tomorrow’s World: Services

Servers are the core of the new commPuting architecture in tomorrows world. It is the services which create value for the rest of the ecosystem of devices and the networks. As Atanu wrote on his blog recently: Stand-alone computing a la PCs delivering services is fine for those who can afford that luxury, but is definitely a show-stopper for those who have very little disposable income and yet can make use of those services that PCs deliver. I remind myself repeatedly that people do not want a PC — what they actually want are the services that a PC delivers. As long as we focus on the fact that it is services — and not the hardware nor the software — that matter to people, we will not end up putting the cart before the horse. So if a firm were to deliver those set of services at an affordable price, it is immaterial to the consumer whether the consumer (of those services) uses a PC or some other device.

The first service that is important is that of computing and storage. The grid needs to deliver the users desktop a dashboard from where the user can manage and interact with other services. As part of the desktop, users would be provided email clients, a productivity suite (word processor and spreadsheet), a web browser, and Instant Messaging clients. The browser makes possible access to the Web. This desktop needs to also be available via the cellphone because it is highly likely that the user will have access to both. The computer can be used to manage the desktop, while the cellphone can be used for alerts, short messages, among other things. So, the grid needs to be able to deliver an appropriately formatted virtual desktop to both network computers and cellphones, allowing users anywhere access to their data.

The second service is that of specific software applications and content relevant to the users interests. Thus, businesses could have a menu of industry-specific applications to chose from. Students would have access to a library of educational content available to them. For entertainment, there would be online games. To make this a reality, there needs to a platform on which third-party application developers and content providers can make their offerings available. Microsofts Windows API made this possible for software developers, while the open formats of the Web made it possible on the Internet.

The third service is around communications. As IP networks proliferate, voice itself will become an application over the next-generation networks. We are already seeing this happen with Skype. Communications is a fundamental need so far, voice has been for the most part a service available primarily through the telcom networks. As computing and communications converge on a common network, telephony will be a critical application on the grid.

The fourth service is built around user-generated content. We are seeing this happen through blogs. Given an easy platform to create and disseminate content, users can bring forth their creativity and experiences to create a rich interchange of ideas, words and images. This is the shift that will happen in the world of media in the coming years instead of there being only the big broadcast websites, there will be a very large number of niche sites, each catering to its own audience. This is what Chris Andersen referred to as the long tail in a recent article in Wired.

Finally, we will also see broadband content move to this platform but in an on-demand variant. TiVo has already shown what is possible by giving users the ability to time-shift television. Increasingly, that will be the way we will consume all entertainment at a time and place of our chosing. There is also an opportunity to create non-films and non-music-based content. Imagine for example if instead of just reading the recipes, they came alive with video attachments showing the actual cooking process.

Thus, tomorrows world will see various services become digital and converge on to a common delivery platform. The network computer will be the portal to a world not just of computing, but also telephony and television. It will be an on-demand world available to us on a screen which is part of a cellphone or a commPuter.

Tomorrow: Payments

Continue reading TECH TALK: Tomorrow’s World: Services