RIM: Can It Be Saved?

Oh dear! RIM’s latest quarterly earnings make grim reading — down on pretty much all metrics and a $125 million loss for the quarter. Is the company circling the drain or can it survive?

Glass half-full:

  • The firm still has solid revenues with good (albeit declining) margins and is making strides toward its new BlackBerry 10 platform.
  • The Playbook made decent inroads into the tablet space, admittedly after a very shaky start and heavy discounting.
  • RIM is still the recognized expert in enterprise messaging.
  • The developer ecosystem is still relatively healthy.

Glass half-empty:

  • BlackBerry 10 is still 6 to 9 months away. In the meantime, iOS, Android, and maybe even Windows Phone 7 will pull further away and define the market.
  • Giving up on the consumer market (which RIM also announced yesterday) means abandoning the place where most smartphones find their initial success.
  • Hardware manufacturing, once a point of pride, now seems like a rock around the firm’s neck. Its failure to build a desirable high-end smartphone demonstrates this.

What’s the prognosis?

RIM needs to turn the corner — and fast. The financial markets and analysts are already writing it off, and its best enterprise customers will follow suit unless it takes drastic action. Here are three options:

  1. Trim the product line and refocus. This is almost an extension of the announcement that RIM is moving away from the consumer space; get 3 excellent devices into the market soon with the new platform and make sure they are the best BlackBerrys ever.
  2. Do a “reverse Nokia.” If RIM is as confident of the BlackBerry 10 platform as it claims, get out of hardware and move into licensing. Who would be interested in yet another smartphone OS is a different question.
  3. Do an IBM. Quit smartphones and focus on infrastructure and applications. Much of RIM’s business smarts are in encryption, traffic management, third-party application support, and platform security. In the future app marketplace world, this could be the basis of a significant business across smartphone platforms. It also gets the firm out of the smartphone OS business — which some are already calling a three-horse race (clue: RIM is no. 4).

April 27: The New Amazon Kindles Hit Europe, But Without The Fire

As of yesterday morning, Amazon is accepting pre-orders for the Kindle Touch (Wi-Fi or 3G) in the major European markets (the UK, France, Germany, Spain, and Italy) for around the same price as the Kindle Keyboard used to sell for — although it will cost more than the later, non-keyboard non-touch device Kindle (naming conventions are not, apparently, Amazon’s strong point!).

The ‘new’ devices have been available in the US since mid-November 2011, so they’re heading to Europe some 6 months later; this is good for most markets except the UK, where the Kindle Keyboard launched at much the same time as in the US.

The Touch has slightly more memory than some of the older devices, is smaller than the Kindle Keyboard, and — of course — has an infrared touchscreen. It’s a nice device with the same excellent screen and battery life, and it continues to be a proof point for single application devices that really excel. However, these devices are looking increasingly expensive when one can buy an (admittedly not great) 7-inch or 10-inch Android tablet for about the same price. And while device manufacturers like Sony and Kobo aren’t offering high-profile competitive devices in Europe to match the Barnes & Noble Nook in the US, they do offer perfectly competent — or even better, depending on how firmly you buy in to Amazon’s ecosystem — e-Ink readers at a variety of price points.

Perhaps the biggest question for tech-conscious consumers though is this: “Where’s the Kindle Fire?” This was announced at the same time as the Touch in the US and also started shipping there in mid-November. I think that Europeans will have to wait quite a bit longer for the Kindle Fire, and here’s why:

While the Fire is Amazon’s future, it does quite nicely with e-Ink devices. Here’s a question for you: Is Amazon more like Google or Apple? With regards to devices, Amazon’s business model is far more Google-like; while they both make devices (or support partner manufacturers), they are really interested in the content and your connection to it — either selling it to you (Amazon) or selling advertising around it (Google). In contrast, Apple has built a compelling ecosystem, including content offerings, but it is still really about selling you that next device. While Amazon makes money from Kindles (both the Touch and the Fire), the real margins are in what it sells you to put on it. If you use an iPad, Android tablet, or PC to download music, e-books, and video from Amazon, its margins from you are higher than for those people to whom it sold a device as well. Confused? Let me explain with a hypothetical example:

  1. John buys a Kindle Fire for $200 (Amazon margin: 20%) and buys $200 of content (Amazon margin: 35%). Total profit margin from John’s purchases: 27.5%.
  2. David uses his iPad and buys $200 of content from Amazon. Total profit margin from David’s purchase: 35%.

Amazon might have made more dollars in profit from John, but the content is infinitely resellable for no extra effort — devices aren’t.

So why is Amazon in the devices business at all? David’s example above gives a clear indication: he may buy e-books from Amazon now, but he’ll almost certainly buy his music, videos, and apps from iTunes. Amazon doesn’t want to be locked out further down the line, hence the Fire. Will Europe have to wait another 6 months for the Fire? Other than the iPad, there is no compelling device to take its place, so it probably will. But, tech-conscious consumers may choose to hold off on buying a Kindle Touch and wait for the Fire, luckily for Amazon its more mainstream consumers that buy e-ink Kindles.

The supporting infrastructure isn’t in place. I’ve touched on this before; the Kindle Fire draws on Amazon’s back-end cloud infrastructure (as does the new Touch) for storage and web browsing support (Amazon Silk). Rolling this out internationally means a significant investment in data centers and legal clearances. This is easier with the Touch, as you are only looking at e-books — most of which Amazon sold you in the first place. The data centers will come, given Amazon’s cloud investments for its business-to-business offerings, but it will take time. One obvious alternative would be to launch the Fire without these cloud facilities — but this lessens both the utility of the device (limiting storage) and how tied in customers are to Amazon.

We’re still waiting for the Android tablet market to shake out. The Kindle Fire is already one of the best-selling Android tablets, but this market still lacks focus (and decent margins). Court cases, form-factor debates, and telcos (particularly in Europe) that are still smarting from the last subsidy disaster (mainly the Samsung Galaxy 10) mean that Amazon can afford to take its time and get its device (and ecosystem) right. Additionally, Windows tablets (on x86 or ARM) are still at least 6 to 9 months away and will be much more expensive than Amazon’s current or proposed devices.

My best guess is that the UK may see the Kindle Fire in late Q2 or early Q3, as Amazon has traditionally used the UK as a European launch pad; Germany and France may follow by year-end. Because of the data center restrictions, it’s possible that other, smaller markets may never get the device in its present form.

GAME Group: Scenarios For The Future (If It Has One)

I won’t retread the series of events that have led to today’s (dire) situation for GAME Group; instead, let’s look at the three most likely scenarios for how this story ends:

1) Recover and survive. This is looking less likely by the day. GAME is in the classic death spiral: 1) cash flow problems lead to 2) suppliers tightening financial terms, which results in 3) an inability to service customer demand, causing 4) even deeper cash flow problems. Add in the crash in the share price from nearly £3 in 2008 to just 1p, and raising additional funds from banks or the market seems unlikely. Some reports are saying that cash is so short that it’s unlikely GAME can pay the quarterly rents due at the end of March. Disposal of some assets like overseas operations (GameStop is reportedly interested in the Spanish and Portuguese operations) or prime retail locations could help the balance sheet long enough for the group to get back up to profitable trading, but this would be a long, hard slog, with suppliers and creditors continuing to view it suspiciously. Most recently, the FT reports (warning: pay wall) that OpCapita (the group that bought Comet for £2 last year) might offer GAME a financial lifeline – again, improving survival hopes or at least buying the firm extra time to come up with a strategy.

2) Get bought by another group (pre- or post-administration). If the current operations can’t be saved, selling the whole firm (or at least the majority UK arm) to someone else is a real possibility. After all, this is a firm with a healthy revenue stream (£1.6 billion for the financial year ending January 2011) in a vibrant market — although admittedly the high-street element is struggling — and with a wide reach across much of Europe (the second-largest gaming market after North America, according to VGChartz). Again, GameStop is an obvious buyer here but is reportedly only really interested in those Spanish and Portuguese gamers, so the price would have to be a real bargain.

This raises another issue: why would anyone buy GAME Group at the moment when they can wait a month or so and buy a more attractive ‘prepackaged administration’ firm without some of the baggage (i.e., creditors) that they will have to deal with in a straight purchase? The upside of purchasing it as a going concern (whether in or out of administration) is the continuity it allows the business; stores can stay open, staff be retained, and suppliers placated. Inevitably, efficiencies will be needed post-acquisition; stores will close and management jobs will disappear or be merged with the structure of the new corporate overlords, but this is still a much better outcome than the worst-case scenario . . .

3) Close down and be broken up. This is still a possibility, particularly given the difficult retail environment in many European territories. If a buyer can’t be found for the firm as a whole, the administrators’ duty is to get as much money back for creditors and shareholders as possible via any means. Overseas operations or the online store could be sold off as going concerns, but the UK may see piecemeal store-by-store acquisitions via management buyouts or selective site purchases by other retail chains (effectively what happened to Woolworths Group in the UK back in 2008/2009).

This last scenario is bad for the economy, bad for employment, and very bad for the game retail ecosystem. Without GAME in the UK, supermarkets become the dominant providers of in-person game sales, which means less title choice, fewer demonstration areas, and the loss of much of the secondhand gaming market. Sure, HMV (while it still trades) offers a good selection of games and more knowledgeable staff, but other than that, gaming retail risks being thrown back 20 to 30 years to a time when (usually excellent) independent shops struggled to make ends meet — but now with the added competition of online retail and digital distribution.

Scenario No. 2 is still the most likely outcome at this stage. This would mean that GAME survives (in some form) for years to come — with the question of whether it can adapt in the long term. Can videogame retail buck the depressing trend set by book, music, and DVD retail and stay relevant? I’ll look at that in my next post.

How The Videogame Market Has Changed Over The Past Decade

In the 12 years that I’ve been following the global videogame market, it has gone from a sizable niche industry of $14.7 billion in 2000 to generating between $64 billion and $74 billion, depending on who you ask (after all, what’s $10 billion between friends?). The industry’s focus has also altered in this time:

Gaming hardware has shifted from PCs to consoles to ‘devices.’ Even 12 years ago, consoles like the brand-new PlayStation 2 had started to refine what ‘gaming’ meant, with sophisticated hardware — including one of the best DVD players at the time — and blockbuster titles. Much of the past decade has belonged to the console world. But in the past 1 to 2 years, we’ve seen the rise of non-dedicated gaming devices (such as Android smartphones and iPads) and the creation of mainstream ‘social gaming.’

The console’s ‘5-year rule’ has ceased to be relevant. Back in the day, new iterations of popular consoles came along every 5 years — making use of more powerful hardware and new storage technologies. Sony was the first firm to flex (if not break) this rule in the modern console age; although it continued to release new consoles, it also kept selling its old platforms for years. However, the current generation of consoles has well and truly broken the old rule. Neither the PS3 nor the Xbox 360 seems likely to be superseded any time soon, despite having been available since 2006 and 2005, respectively.

Connectivity has moved from being the exception to the rule. It’s sometimes difficult to remember what the gaming world was like in 2000. The PlayStation didn’t have any connectivity out of the box; you got an analogue modem with the Dreamcast; and the Ethernet-equipped Xbox was still at least a year away in most territories. Everything you did on consoles (and even on many PCs), you did with physical media — no friends lists, no DLC, no patches.

Digital distribution has made PC gaming interesting again. Given all this, has the PC become redundant as a gaming platform? Far from it! Two (diametrically opposed) trends have kept it interesting:

  1. The rise and rise of social games. As Zynga has shown, there is a massive appetite for social games either within social networks or via dedicated online portals. While mobile devices will, inevitably, become the dominant platform for these games, the PC currently still dominates as the device on which to play Farmville, Triple Town, or Bejeweled Blitz — aided, no doubt, by Apple’s iOS devices not supporting Flash.
  2. The digital distribution of ‘proper’ games — and the rebirth of indie developers. Led initially by Valve’s Steam service, the distribution of PC games electronically has grown hugely over the past 18 months. Interestingly, this has allowed small developers who stood no chance of monetizing a ‘boxed’ release in retail to do their thing; the Binding of Isaac, Super Meat Boy, and (my personal favorite) Dungeons of Dredmor are great examples here. Add to this great initiatives like the Humble Indie Bundle, and the PC gaming space is more interesting than ever.

Mega-publishers have been created. Firms like EA, Activision Blizzard, Square Enix, and Namco Bandai have grown from a decade of mergers and acquisitions — as some of their awkward names might suggest. This has been driven partly by games becoming multi-year, multimillion-dollar projects that favour larger-scale operations and partly by the need for diversification (as with Blizzard contributing World of Warcraft revenues to Activison).

Many other things have also changed, such as the rise of mega franchises like Call of Duty, battles over the second-hand market, MMORPGs, etc.; several of these warrant a whole post to themselves, but I don’t want to labor the point here. All these changes are putting an obvious strain on some of the traditionally successful firms in the space. Most notably, boxed-game retailing on the high street is in crisis, GAME group in the UK being the starkest example of this — I’ll look at their prospects in my next post.

What Does HDD Manufacturer Consolidation Mean For The Wider Technology Industry?

As of last week, when Western Digital’s proposed deal to buy Viviti Technology (formerly Hitachi GST) was finalized, the world has just three global suppliers of hard disk drives (HDDs). Western Digital, Seagate, and Toshiba control around 50%, 40%, and 10% of the market, respectively. The history of acquisitions in this space is fascinating, as shown by this diagram (courtesy of a great article on Wikipedia):

Admittedly, some fairly stringent conditions have been imposed by regulators on both Seagate and Western Digital for their latest acquisitions — including running separate operations for a number of years. But a market of up to 700 million HDD units per year (if you extrapolate from iSuppli numbers) is boiling down to just three suppliers. While solid state drives (SSDs) are manufactured by a whole range of firms, these will be too expensive for most applications and will have too low a storage capacity to match hard disks for the next 3 to 4 years.

What does the wider consumer technology industry gain and lose from this accelerated market consolidation?

Glass half-full:

  • Stability. All three firms now have a steady volume business, decent balance sheets, and forecasts of healthy market growth for the next few years.
  • Concentrated evolutionary innovation. The three firms will now provide a top-down focus for research into improving capacities, energy usage, and form factor. While there are some differences in capability — Western Digital has not yet developed hybrid drive technology, for instance — all are focusing on a continued supply of better and better conventional HDDs. This isn’t particularly sexy, but it is at least dependable.
  • Consistency. Fewer manufacturers mean fewer variations in elements like controllers, cache, and software drivers, making the specification and manufacturing process somewhat easier.
  • Better ‘partners.’ One additional benefit deriving from the previous three points is that firms in the position that Western Digital, Seagate, and Toshiba find themselves in often start making more of an effort to be proactive partners with their customers — allowing them to better understand client demands and needs to ensure that their competitors don’t get a foot in the door.

Glass half-empty:

  • Reduced supplier competition. Obviously, all three firms will compete massively for market share, particularly Seagate and Western Digital; Toshiba is so far behind that it doesn’t stand a realistic chance of catching the top two. But where is the plucky little manufacturer targeting industry verticals? Who will force the pricing issue?
  • Global supply chain risks. As we saw with the Thailand floods in October 2011, disruption in a manufacturing supply chain concentrated in one country or region can have a knock-on effect, although arguably it wasn’t as much of a disaster as many predicted — helped by generally lackluster PC and technology sales. Will the supply chain consolidate even further in China and Thailand now that just three firms control the purse strings?
  • Suppliers with more power. Consumer technology manufacturers already have to deal with component-supplying titans like Microsoft, Intel, and Samsung; you can now add Western Digital and Seagate to that list.

Overall, these acquisitions show the natural (if somewhat accelerated) consolidation of a costly manufacturing industry that doesn’t necessarily deliver fantastic margins; those are, hopefully, reserved for the final device manufacturer. For the technology industry, the pluses probably outweigh the minuses; even in the worst-case scenario where competition decreases, SSD manufacturers will keep pushing the envelope and keep the HDD titans on their toes.

The Consumer PC Market: Likely Outcomes In The Next 1-2 years

Taking where we are today as a baseline and applying consumer usage scenarios and vendor strategies, let’s make a few predictions (after all, you can take the analyst out of the major analyst house . . . ). Note: I’ve excluded things that are guaranteed to happen, such as the iPad 3 (probably announced within the hour).

  1. Windows 8 dominates new PC sales by the end of 2012 . . . A fairly easy one; all indications are that Windows 8 will be in the market by the end of Q3 2012 or early Q4 2012. There is no reason to believe that the OEMs won’t just switch to selling consumer PCs with the new version on it (as they did with Vista and Windows 7). Even in a diminished PC market, this means that a significant number of consumers will be running ultrabooks (at the high end), mainstream laptops, and even netbooks with Windows 8 by the end of the year. One interesting question: will Microsoft bow to early feedback on the consumer preview and allow non-touchscreen laptops and desktops to have the Metro UI turned off?
  2. .  . . .but will have a slow start on tablets. However, Windows 8 x86 tablets are likely to be pricey initially (even compared to an iPad) and targeted at business; they do offer that full compatibility, after all. Consumers will be waiting until 2013 for reasonably priced x86 tablets. ARM-based tablets, however, will likely target consumers straight out of the gate (probably around the same date as the Windows 8 release), but OEMs will be cautious here; they were burned by their enthusiasm over Android tablets. Again, these devices are likely to be expensive compared to the rival devices available by this point (see below).
  3. Motorola/Google bring out an ‘optimized’ Android tablet. While still in the final stages of regulatory approval, all signs are that the Google purchase of Motorola will go through soon. While primarily being about ‘litigation replacing innovation’ (i.e., buying a bucket-load of defensible patents), this also gives Google its first foothold in the hardware space. Motorola’s Xoom tablets were already some of the best Android tablets — not a very crowded field, admittedly — and with extra resource and on-tap Google engineer access, they should improve even further. The real question is the extent to which Google is prepared to single out these devices and risk alienating other Android device manufacturers.
  4. Amazon intensifies its efforts with new devices and more geographies. The Kindle Fire is red hot (!) in the US, but hasn’t made it beyond that country’s borders. This is largely thanks to Amazon making efforts to create a more holistic ecosystem for the device — as Apple does; the tablet itself is no great shakes, being low-powered, lacking cameras, and having that love-it-or-hate-it 7-inch form factor. (Of course, if Apple does bring out a 7-inch iPad, then people will definitely love it.) Expect the Kindle Fire 2 by mid-year, potentially sold alongside the (even more) discounted original device, just as Amazon has done with its e-reader ranges. Geographic expansion is somewhat more problematic given that much of the device experience is based on Amazon’s back-end cloud services; these would have to be localized and comply with regional privacy and copyright law — far more tricky than turning out 10 million new devices from a factory in China!
  5. Intel drives the ultrabook message. Having been taken somewhat by surprise by the rise of ARM architectures in computing devices rather than just phones, Intel will continue to push the envelope in terms of performance, power usage, and form factor for its x86 family. Front and center will be the drive to create the ultrabook category as a viable alternative to the MacBook Air; while the Apple Macs use Intel chips, Intel stands to sell far more if the other OEMs can up their game with premium laptops (and premium Intel components). These premium products are hitting the market at a bad time for consumer spending though, so it will take some time for ultrabooks to reach critical mass.
  6.  Apple “merges” iOS and OS X. This is contentious — and not just because you’re looking at different architectures, UIs, and usage scenarios today. Could ARM architectures run OS X? Yes, apparently. Would it make sense to have iOS on a Mac? Probably not. Regardless of the underlying OS — and a full merge is still a long way off — Apple will certainly merge the look and feel of its two OS offerings and increase interoperability. Adding touchscreens to Macs will be the first step here.
  7. PC retail doesn’t get any easier . . . Consumer PC retail on the high street, like many non-essential retail markets, has been a difficult business since the recession. The increasing strength of Apple’s own retail channel is creaming off some of the more profitable transactions, leaving retailers to second-guess the next hit product. (Hint: it wasn’t Android tablets, and it won’t be ultrabooks for some time.)  They can’t even rely on software revenues because . . .
  8. . . . app stores continue to gain in importance. As more devices ship without physical media drives (e.g., tablets, ultrabooks), the emphasis on getting new software will automatically shift to downloading. App stores offer a great one-stop shop for this. Google, Apple, Intel, Valve, and EA (in gaming) already run these, and Microsoft is placing a lot of emphasis on this with Windows 8. Developers, particularly small ones, will face the difficult choice of switching to an app store (from their own digital distribution model) and putting up with a vetting process and someone taking a cut — or risk being sidelined.
  9. Consumers’ cloud adoption alters the dynamics of local devices and local storage. More on this in another post, but this is the situation in brief: more services streaming media or offering cloud storage combined with rock-solid connectivity move the needle on what components devices need to have built in. A smaller, faster SSD storage component should be adequate if all your music, photos, and video live in the cloud; similarly, you don’t need to install gigabytes of Microsoft Office on your PC if you can manage with something like Office 365.

Consumer Usage Scenarios: ‘Computing’

While they’re not usually as focused as business users — whose approach is rather more “It’s my job to do task A, then task B by the end of the day” — consumers’ computing behaviors tend to fall into the following broad categories:

  • Consumption. This usually means the consumption of linear media: watching videos/movies, listening to music, reading books, general web surfing. In general, the three key criteria for a consumption device are an adequate display, good audio (mainly for music), and an easy-to-use user interface (UI).
  • Communication. Fairly self-explanatory, this involves anything related to making a connection with another person or people — one-to-one or one-to-many. This includes traditional applications like email, voice calls, and messaging, as well as some of the newer tools like social networks and Twitter. Again, the device needs to be as easy to use as possible — preferably blending into the background – and always having it with you is a plus too.
  • Interactive entertainment. By this, I mean gaming — a reliable usage scenario for most devices, ranging from humble smartphone games to sophisticated home consoles. This is pretty much the only usage scenario where software (i.e., the games) generates significant direct revenues from end users. The more powerful the device, the better it can present games – though this can be negated by compelling gameplay.
  • Transactions. Here, eCommerce and online banking are the most widely used applications. Generally, while these tasks are not much fun, they need to be done and can usually be done much more efficiently online. Robust connectivity is needed here, along with compatibility with the (secure) application being used.
  • Work-related activities. A minority of consumers also use their own devices for work or to support study. Compatibility becomes key; whatever device they want to use must be compatible with an employer’s system or school/college systems.
  • Life stuff. This is something of a cross between work activities and pure transactions. Think of this as achieving those little daily tasks, such as creating posters for charity sales, keeping a family calendar updated, or coordinating holiday arrangements. The ability to print is often important here, as is giving multiple people the ability to access and edit these tasks.
  • Creation. Held up (rightly) as the pinnacle of consumer usage, this ranges from simple tasks like assembling a photo album to writing a blog or book and even to music or video production. Creation may involve specialist software, and often has an engaged online community to get involved with for support and advice.

Another axis can be applied to all of the above: How often do you perform these tasks? Daily, weekly, once a year? For instance, if you only need to create and print a note once a year, you wouldn’t pick a device based on that as a core need.

When many of these tasks, regardless of the category, required local software and storage, consumers would opt for a PC. However, the emergence of single-function devices (e.g., DVRs, eReaders) that excel at just one thing offer real alternatives as do smartphones and tablets, particularly for content consumption and communication — two of the most popular consumer activities.

The above table takes a crack at rating general-purpose device options by usage scenario. The PC still has the edge overall, but notice that other devices edge it out in some of the more popular scenarios.

So, given this multitude of consumer motivations and scenarios, where does the industry go from here? I’ll make my predictions in the final post in this series.