vendor strategies

Hypothetically, What Would A $199 Windows RT Surface Tablet Say About Microsoft’s Strategy?

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The inter-web is awash with rumours that the Microsoft Surface tablet (ARM version) will launch in October at a price point of $199. This is less than half the price many people were expecting on the assumption that Microsoft was following the more usual “price it the same as an iPad and see if it sells” strategy (it won’t).

Is it plausible that this is the target price? If so, and I have no deeper insight into the validity of the rumour than anyone else, what does it tell us about Microsoft’s state of mind?

  • Suddenly, it’s a two-platform strategy: Windows RT is for media consumption. One of the main concerns around both ARM and x86 tablets was the potential for consumer confusion – particularly if they are similarly priced. Putting the Windows RT surface device out at $199 does away with much of that confusion and puts the device squarely in the affordable “media consumption” tablet space (something for which Microsoft has continually derided the iPad and Android tablets). It could be the best device in this category – blowing away the Kindle Fire. Of course, this low-functionality positioning is a bigger risk if the breakeven model relies on the upsell of productivity apps (its unclear what version of Office will ship with the Surface) or a vibrant apps marketplace – you don’t need either of these to surf the Web or watch videos.
  • It’s a recognition that this is the only way Windows RT will gain traction. As I said when ARM-based Windows was announced back in early 2011, this seemed like a major coup. Since then, though, it has looked more and more like the Windows RT tablet would be DOA given its lack of backwards compatibility, improved x86 performance, and a price point similar to the iPad. But, $199 for a very compelling-looking device would mean that all bets are off; this is a sweet-spot price for impulse consumer electronics purchases and would guarantee very healthy sales (stock allowing). It would also have the added benefit (to Microsoft) of killing off the premium Android tablet market; then again, Google’s Nexus 7 is doing a pretty good job of this already.
  • It’s a massive internal shift in Microsoft’s strategy. If bringing out its own tablet and disenfranchising OEM partners wasn’t enough, a major Microsoft division is now looking at taking a bath on each unit sold. Bear in mind that this is one of the divisions that has always looked down on Xbox and the consumer businesses for haemorrhaging money. Sure, Microsoft sold Xbox hardware at a loss, but game consoles are recognized industry loss leaders and have shown that the razor/razor-blade model works. Selling enough software, content, or advertising (ha!) for a tablet that may cost you $100 more than the asking price to get out the door is a different matter altogether.
  • It’s an explicit statement of intent: OEMs will only be able to compete with x86 devices. OEMs are already hurting from a declining (traditional) PC business with razor-thin margins; they can’t afford to subsidize their own Windows RT tablets in the same way that Microsoft can. And nobody is going to pay a significant premium for an HP, Lenovo, or Dell device over Microsoft’s own Surface tablet. So if the price point is real, Microsoft is basically carving out the ARM tablet market for itself.

It’s an interesting time for Microsoft. It desperately needs a successful tablet launch to stay relevant — and for that reason, the first three points above are at least plausible. The final point though is more far-fetched. Kicking the OEMs when they are down is one thing; letting them announce Windows RT devices and then bringing your own to market at half the price is more akin to robbing them at knife point. For this reason, my opinion is the $199 price is bogus or contains contractual telco smallprint.

Earnings Season: What Recent Results Say About Consumer Firms’ Future Prospects

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In what is turning out to be one of the most interesting quarterly earnings reporting seasons for some years, Apple, Zynga, Nintendo, Microsoft, and Intel have all “surprised” the market with their “low” numbers — but there are fundamental differences in why these firms have had a tough quarter. (I’m going to use calendar quarters rather than financial quarters to avoid things getting far too complicated).I can think of four main reasons (I’m sure there are more):

  • The tough product transition period, part 1: Apple. Apple had a pretty good Q2 2012 — far better than a year ago — but unfortunately it came on the back of a huge Q1 2012 (largely thanks to iPhone 4S). Citing poor demand in Europe among other factors, Tim Cook also made some interesting comments on the earnings call alluding to anticipation of iPhone 5 reducing demand for current products. Pent-up demand for the new phone seems unprecedented; once this device hits the market, Apple numbers should “improve.” It’s a testament to the financial markets’ belief that Apple can do no wrong that this shock miss of Wall Street’s inflated earnings estimates (albeit more in line with Apple’s own projections) shaved 5% off the share price overnight.
  • The tough product transition period, part 2: Nintendo. Another firm whose current products are looking tired but whose shiny new products aren’t quite ready is Nintendo. The Wii has dropped off console sales charts in the past year, and while the 3DS is doing good business in the portable space, the release of new Wii U consoles is still (probably) several months away. It’s going to be a tough 2012 for Nintendo; crucially, there isn’t that guaranteed pent-up demand for the new console that Apple enjoys with the iPhone 5.
  • Great business but bad investments coming home to roost: Microsoft. In many ways, Microsoft is also in a transition period — Windows 8 OS and accompanying Surface devices won’t arrive until October 26, 2012 — but luckily the rest of its products haven’t run out of steam. In fact, Q2 2012 was a good quarter with rising revenues; it’s just a shame that its on-going fruitless attempts to build a consumer media/advertising strategy led to a $6.2 billion writedown.
  • A changing market causing (hopefully) short-term pain: Intel, AMD, PC OEMs. As expected, a tough global economy and the on-going consumer (and business) infatuation with tablets is hitting traditional PC sales numbers. Ironically, the solution to the tablet challenge may also be causing consumers to delay PC replacements while they wait to see a proper tablet + Windows solution, which won’t happen until the end of October.
  • Wow, we did not expect that! Zynga. Cracks started to appear in Zynga’s “grinding games without the fun game bit” business model some time ago; its valuation at IPO (in November 2011) was based on the continuing stratospheric growth of user numbers (and the accompany microtransaction revenues) seen with early hits like Farmville and Mafia Wars. Unsurprisingly, like every other videogaming market, social games have turned out to be a hits-driven industry, with relatively low barriers to entry and a fickle audience. It also highlights the danger of relying on someone else’s platform (Facebook) over which you have no control. And the strategy of buying a rival “star” product/ firm (Draw Something by OMGPOP) for top dollar just as it became a “dog”(entirely bypassing the “cash-cow” phase) didn’t help . . . see this if that last sentence didn’t mean much to you.

Of course it’s not all doom and gloom: ARM and Samsung have reported excellent results of late — and even Facebook did moderately OK, even if that didn’t stop the markets from punishing its share price for not doing better, probably due to the fact that the firm still hasn’t worked out how to really ramp up revenues.

So, while Q3 is typically a quiet period for consumer firms, Q4 is shaping up to be a litmus test for firms like Apple, Nintendo and Microsoft – new products that will need to succeed (and fast), landing at a time when consumers still seem unwilling to recommence their profligate spending ways.

 

Sony Buys Gaikai: A Solid Investment In Future Services

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This week Sony, or more specifically Sony Computer Entertainment, bought Gaikai — the streaming game service. Rumours of a tie-up had been circulating prior to E3, and Gaikai had made no secret that it was on the market for around $500 million. The $380 million Sony paid is well under that, but even so it must have been a difficult decision given the Sony group’s current performance.

What does the purchase mean for Sony and the wider gaming market?

  • Sony is buying networking and service platform expertise . . .  Sony has struggled long and hard with online services and software: its PlayStation network is now robust but suffered an embarrassing hack attack last year, while its PC and phone software (Media Go, PlayStation certification for phones) seems to lag a generation behind folks like Apple or even Microsoft. Gaikai’s core networking and service delivery expertise can fix many of these issues in a relatively short time (months rather than years).
  • . . . as well as console backward-compatibility. Despite consistently offering by far the best access to and support for older titles of today’s three platforms, Sony has long been the recipient of gamer complaints about the removal of backward-compatibility as it has released new hardware iterations of the PS3. Streaming potentially allows both backward-compatibility for today’s PS3 and, potentially more intriguingly, for the future PS4 — allowing it to run today’s PS3 games without additional hardware.
  • Non-console devices can join the game. While not explicitly stated as an aim for Sony Computer Entertainment, its rich gaming back catalogue, along with Sony’s engineering expertise in PCs, TVs, tablets, and phones, means that PlayStation games could now come to all of these platforms. This would provide a USP (if kept exclusively to Sony hardware) and an additional revenue stream for games with little additional investment.
  • Where does this leave Microsoft? Microsoft is already working with OnLive, the rival (and arguably more well-known) game streaming service. However, the relationship has been rocky at times (see this). Does Sony’s news justify Microsoft engaging more here — or even considering an acquisition? Probably not, if Microsoft (along with investors like HTC) can get ready access to the technology as ‘partners’ – Microsoft is already much more competent at online execution in gaming.
  • Connectivity will need to take the strain. One thing is for sure, users will need solid, fast, low-lag broadband connections (and in-home wiring/wireless) to make any of these streaming services work consistently. Netflix and Hulu sometimes struggle with one-way traffic when streaming video into the home; gaming services need to do this as well as upload user actions and act on them at the server end. Let’s also not forget that consumers surrender some of their control with these services — starkly illustrated by the storms last week that took chunks out of the Amazon cloud. This is slightly inconvenient if you want to post your latest wedding dress photo to Pinterest; it’s disastrous if you are 3 to 4 hours into a streamed gaming session without a local save!

Microsoft Surface Tablets: A Core Strategic Change For Microsoft.

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Yesterday, in a much-hyped announcement, Microsoft unveiled its future tablet offerings — both an ARM and an Intel-based 10.6-inch tablet running their respective flavours of Windows 8.

While no pricing details have been announced, these aren’t budget devices: they are likely to be on par with premium Android tablets ($500) and the iPad ($650) for the ARM-based device and approaching Ultrabook prices ($700 to $1000) for the Intel-based tablet. I’ve written previously about how the tablet war wouldn’t really kick off until Microsoft arrived, so what can we draw from these initial announcements?

  • The Intel tablet will clearly be targeted at business, at least initially. Microsoft has been running interference over the past two years around businesses adopting iPads as core employee devices. When the Intel-based Surface ships (probably early 2013), it will at last have a proper solution for its big enterprise customers — and one that it can supply directly rather than relying on the vagaries of OEM support. Given a reasonable price point, proven compatibility with legacy Windows applications, and robust security and remote management abilities, I would envisage high levels of interest in the product.
  • Ouch! Talk about kicking OEMs when they are down. Dell, HP, and Acer are all reporting poor financials, mainly thanks to the lacklustre PC market (Lenovo is an exception here, doing rather well, thank you very much). Imagine you are in their position; suddenly, the biggest software supplier you work with has decided to build hardware — and not just any hardware, but the new premium form factor you were planning to use to relaunch your business. Sure, this might “prime the pump” for Windows 8 tablets from other OEMs (as Ballmer hopes) or it could be like partnering with Nokia on phones — instantly alienating other manufacturers like HTC, Samsung, etc.
  • The Windows RT Surface — hmm. Windows RT on ARM seemed like a great idea when announced last year, but in the subsequent months, Intel has pulled a rabbit out of its hat and got x86 architectures performing almost as well as ARM while not being power hogs. So, you’ll now have the choice of a premium ARM tablet running Windows RT (admittedly with free MS Office) but doing little else that people would recognize as Windows — or an x86 tablet running “proper” Windows 8 with full (or nearly full) backward compatibility for more or less the same price. This is not a difficult choice. Admittedly, given that Microsoft is targeting businesses initially with the x86 tablet, its version will be more expensive, but expect one of the OEMs to have a cost-comparable 10-inch tablet running full Windows 8 at or just after launch.
  • It’s time for Android to step up. Android tablets have represented the only really viable alternative to the iPad to date, and yet most have failed to make a mark with buyers. We’re finally getting some good devices (like the ASUS Transformer and Samsung Galaxy Tab), and the Google Nexus tablet is — allegedly — just around the corner. If manufacturers (and Google, of course) want to stay in competition, they need to up their game and produce more stable, aggressively priced devices that can either undercut the Windows/iOS devices (like the Amazon Fire) or offer something better.
  • Are apps the be all and end all? Much discussion is already centring on whether the Surface tablets will have a sufficiently developed apps marketplace to thrive. Certainly, the iPad has been driven by the legacy success of the iPhone apps marketplace; certain categories of applications, such as games, social media clients, and photo manipulation, figure highly in terms of what people use their tablets for. Given that this is effectively a new platform, the ARM Surface will need apps to survive, but the x86 Surface may be able to flourish (at least initially) without this. Why? Windows 8 (on x86) will be the first OS designed for a tablet with backward compatibility (and no — backward compatibility with a phone doesn’t count); on day one, it will already have access to more apps than all the other platforms (although, admittedly, many of these won’t work well with the Metro UI out of the gate).

Overall, while we’re still awaiting vital details, the Surface announcements do at least show that Microsoft is prepared to make a major strategic shift into hardware to protect its position. I have high hopes for the x86 Surface (and the competing OEM that it might spur), but I see the ARM Surface device as falling between multiple stools — a tiny apps market, not as polished as an iPad, not as cheap as an Android device, and not as practical as its own stablemate.

So, When Do The Tablet Wars Start?

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The iPad is a true phenomenon, selling around 70 million units since launch and projected (by Gartner) to reach up to 169 million units per year by 2016. It has demonstrated the consumer (and, potentially, business) desire for a simpler device that delivers a fantastic media “consumption” experience in conjunction with simple yet compelling apps.

Android tablets and Windows 7-based tablets have also been around for some time, so you’d have thought that the tablet “war” would have started already. Not so much. There have been a couple of false starts: the Samsung Galaxy Tab, BlackBerry PlayBook, and HP TouchPad — the latter two briefly even outselling the iPad in certain segments/markets, but only after “fire sale” discounting — have all been heralded as serious challengers but have failed to make an impact. These were certainly no more than “skirmishes” rather than an all-out war.

The Amazon Fire made some inroads in Q4 2011, extending the firm’s e-reader device line, but this seemed to wither on the vine in Q1 2012. New devices like the Asus Transformer and second-generation Samsung Galaxy tablets seem to be better received, and Google’s own tablet may arrive soon. These will, doubtless, cement Android’s position (based on cumulative sales) as a significant second-place player. But the tablet war won’t really heat up until Microsoft hits the market with both Windows 8 RT and Windows 8 tablet devices.

Microsoft needs Windows 8 and Windows 8 RT to work straight out of the gate.

Windows RT on ARM architectures will provide a proper Metro-driven, Windows-like tablet — one better than those cobbled together with Windows 7 to try and keep business clients from buying iPads — and at a price point (hopefully) comparable with other tablet offerings. Meanwhile, if you need real Windows on a tablet with proper backward compatibility, Windows 8 tablets with x86 architectures should arrive at around the same time. Pricing on the latter is likely to start high and then trickle down as component prices drop; it’s also where we’ll see interesting “hybrid” devices like laptops with touch screens and tablets with slideout keyboards.

It’s a bold move and, arguably, one that Microsoft should have made last year; Windows RT will introduce a lower-cost iPad competitor with a good user interface (UI) and some legacy compatibility (for Office docs), but it may end up as just another Zune HD — superior to the iPod in terms of hardware and UI but gaining zero traction in the market. Similarly, Windows 8 tablets could be far too expensive; if they cost more than a decent laptop and iPad combined, it’s hard to envisage rational IT managers or brand-conscious consumers opting for the untried tablet.

Perhaps this is why forecasts from the likes of Gartner and DisplaySearch see iOS as the leading tablet platform all the way out to at least 2017, with Android only gaining ground slowly and Microsoft performing poorly (according to Gartner) or atrociously (according to DisplaySearch).

It’s too early to call a winner in the long term.

The truth is that with no international market for the Kindle Fire yet, only rumors of the Google tablet, and no pricing on details for either flavor of Windows 8 tablet, it’s too early to announce the winner of this war. Apple heads into the conflict with tremendous momentum and economies of scale, but the same could have been said of Sony, Kodak, or Atari in the past. The key questions will be:

  • Who will deliver a tablet that supports those neglected usage scenarios (transactions, work stuff, communications)?
  • What will be the difference in price points between Windows RT devices and entry-point x86 Windows 8 tablets? Will all Windows 8 tablets be “transformer” or hybrid models that have slideout keyboards . . . or will there be a mainstream, pure tablet offering based on x86 architecture?
  • How long will there be manufacturers with feet in both the Windows and Android camps? Will we see this breaking down, as per today’s “PC manufacturers” and “smartphone manufacturers”, with just a few firms (Samsung, Apple, Sony) being global players in both?
  • Who is going to explain to the poor consumer standing in a PC retailer the difference between and unique benefits of: 1) a traditional notebook running Windows 8; 2) an Ultrabook with a touch screen running Windows 8; 3) a tablet running Windows 8; 4) a tablet running Windows 8 RT . . . even before we factor in Apple devices, Android tablets, hybrid Android devices, and Chrome OS laptops!

Online Cloud Storage: Future Table Stakes Or Killer App?

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Google has at long last officially announced Google Drive, and tech blogs are awash with comparisons to Dropbox, iCloud (slightly unfairly), SkyDrive, and other cloud storage services. The early consensus seems to be that SkyDrive just wins out in terms of free storage and incremental paid storage (particularly if, like me, you already had a SkyDrive account and opted in to the free 25 Gb capacity upgrade), while none of the main platforms support all the clients that you may have been hoping for (omitting Linux, Android, iOS, or Windows Phone depending on which platform you’re looking at).

This explosion in available online storage has looked inevitable ever since Dropbox (and several other firms) really hit home with simple desktop folder-like services that don’t try to do too much (sync calendars, offer workflow solutions, etc.). Security experts will argue about whether the encryption is up to snuff (it isn’t), but most consumers will be storing personal (non-confidential) material on there anyway.

Arguably, we’re only at day 1 of the real competition. Features (and third-party clients) will be added, the free storage amounts will (inevitably) increase over time, and different business models and audience segments will emerge — for example, services for SMB customers are already available.

The key question, though, is whether these firms can make a business out of this. In the short term, certainly — as long as they’re offering something that isn’t free elsewhere (remember those “premium” web email services that offered more storage before those limits pretty much disappeared — thanks, Google) or that has better functionality/is easier to use than the competition (Dropbox still scores well here). The problem for the pure-play offerings is that when storage becomes just another feature of Microsoft’s, Google’s, Amazon’s, or Apple’s online offerings — most of which are free or wrapped up in one easy subscription — the justification for paying separately for the service disappears.

This is where the dreadful “stickiness” term comes into play: Dropbox, ADrive, JustCloud, SugarSync, and hosts of others need to fight to make their service so attractive (or difficult to give up) that continuing to pay a reasonable fee seems the best option. But this is tricky; they can’t offer more and more storage, and erecting barriers to prevent consumers moving their files elsewhere defeats the whole object of the service. In fact, as the once-superior Dropbox client shows, any advantage is likely to be short-lived. One possible key to survival is making the storage useful to the user’s social circle, not just the user. I’m less likely to move my thrilling 4-hour video of the kids’ last birthday party if it means I have to bring the grandparents up to speed on how to register for and access a new online storage solution. Dropbox is introducing direct links to customers’ shared files, which is a nice step in this direction.* Its referral program’s offering of extra storage for each person you get to sign up has also swelled its customer ranks nicely to 50 million people – that’s a lot of people, and unlikely to decline too rapidly.

However, I’m not convinced that the best route for Dropbox and its ilk beyond the next 12 months isn’t to get bought by the likes of a Google or Microsoft looking to grow their own user base. An alternative, for the more ambitious pure plays, would be to partner into an emerging ecosystem to fight the established players; combine online storage with a social network, Twitter client, location service, and mobile data plans, and suddenly you are looking at a compelling bundle. Unfortunately, most of these other apps are free to use and already have privacy concerns, so online storage of personal files may not fit well with this. Google will have to face this challenge itself.

* (In fact, Dropbox’s official blog pretty much uses a [less cynical] word-for-word version of the previous example, which I’ve only just looked at, honest!)

How To Keep Videogame Retail Relevant

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Globally, store-based videogame retail is suffering. In addition to the ongoing collapse of GAME Group in the UK (which is half-saved for now — sort of), NPD recently reported a decline of 34% year-on-year for store-bought games in January 2012 in the US, while hardware declined slightly more (38%). Admittedly, January can be a flaky month for retail, but the overall trend for physical software sales is down.

Why? Some of this is down to a struggling economy and cautious consumers, but it’s also a natural side effect of the trends outlined in the previous post:

  • Hardware revenues are declining. No new consoles for some months to come (aside from the PlayStation Vita) means reduced hardware sales; it’s pretty much just accessories and add-ons like Kinect and Move.
  • Digital distribution cuts out retail. Digital distribution means money flows directly to publishers (often via platform owners like Sony, Microsoft, and Valve). Even for shop-bought titles, downloadable content can extend play lifetime and put off the next boxed product sale. NPD also recently worked out that $3.3 billion was spent in the US and Europe on digital downloads in Q4 2011. Physical retailers would have seen virtually none of this (aside from selling gift cards).
  • Non-gamers don’t see game retail as a desirable shopping “experience”. Most worryingly for game retailing, market growth is almost all in social or mobile gaming. Even if there was a physical product, would mainstream consumers go to GameStop for these?

So what can retailers do? They need to change people’s perceptions of why a store is better than an online portal, otherwise they will follow music and book retailers into obscurity. While GAME group has had a stay of execution, it will need to do something different to secure its long-term future. Four foundations spring to mind (along with the current but declining day-to-day business of software sales):

  • Bring secondhand games to the fore (even more). Secondhand game sales are a controversial topic that retailers have typically had to tip-toe around. Publishers get angry at what they see as the lost revenue of a new game sale, but for retailers, a successful secondhand game section makes better margins than new game sales. They have to be well managed to do this though; this means more selective game trading (what you buy, how much you pay), better inventory distribution across multiple stores, and even offloading excess stock via an online portal, partner, or eBay. Making the secondhand section look less like a post-hurricane garage sale would help, too. Of course, publishers may object to this — and come the next generation of consoles, they may pretty much kill this market by withdrawing physical media — but for now, they continue to bring in money in tough economic times.
  • Stop toying with online and go all out. The game retail groups may have online portals and e-commerce facilities, some of which are even quite good, but they aren’t Amazon or Play.com good! Retailers need to bring their unique high-street presence to their online offerings: order and pick up in store, trade in and drop off at store, virtual events, and local store forums should at least level the playing field with the big e-commerce players.
  • Make the stores more relevant. Yes, I’m going to use the dreadful “retail experience” phrase — but I am going to try not to reference Apple Stores (darn — too late!). Physical game stores have limited square footage, a lot of stock, and cater to a young male audience; they are never going to be “minimal”, “airy”, or “smell good” — but they can change some things. Reduce front-of-store stock and countless racks and fulfill from the back room; introduce more demo pods and advice points. More interestingly, think about demo events, “parent evenings” where you explain things like age classifications and downloadable content — and refocus on supporting digital, with stored value cards, memory cards, and capacity upgrade advice. And always remember: customers without credit cards are your friends!
  • Get publishers more involved. Publishers might not like an increased focus on secondhand, but game shops still remain one of the most effective ways of directly reaching the more active component of their customer base. It’s time for them to help out more. Move beyond exclusive downloadable content (which costs publishers virtually nothing) and get publishers to provide previews and showcase material and to create competitions. Ironically, small PC game developers (most of which distribute digitally) may be the best bet here; they can offer show reels, demos, and individual levels that the in-store staff can support. This may also help revise the relatively poor image that store staff have in the eyes of the gaming community.

RIM: Can It Be Saved?

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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

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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.

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

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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.