My bet is that by the end of 2012, it will be hard to find any branded phones which won’t run a smartphone
I also showed how pricing has evolved over the last three years.
Two days later an article in Fortune's Google24/7 blog highlighted the possible price points of low-end smartphones:
I had a chance to speak with Jim Tran, VP/GM – Handset Line of Business for Broadcom, who was able to elaborate on the details of the new processor and what it meant for the industry. Here are some of Broadcom's bullet points:
The BCM2157 baseband, since it combines many functions on one chip, is able to run more efficiently, meaning less battery power will be needed than on current basic handsets
Low-cost, low-power, 65 nm digital CMOS process means the silicon will be cheap
The dual-core processors will run at 500-800mhz.
Supports portable Wifi hotspot and Android 2.2 and up
But the kicker is the price. Tran says that phones made from the BCM2157 chipset will retail for under $100 and may dip as low as $75. Those devices should debut in just 3-6 months (and we might hear about them next month at CES)....
To be clear, That sub $100 price is not the cost of materials, it is the suggested retail price after the manufacturers (and carriers) have taken their profits.
My own data shows that the average selling price for the top eight phone vendors for Q3 of 2010 was $156. Smartphone-only vendors were charging $450 on average and diversified vendors selling both smart and non-smart phones were charging $144 on average.
Nokia's ASP for its entire line-up was $88 (spread over about 84 million non-smart and 26.5 million smartphones).
What strikes me about the claim from Broadcom is that a $100 retail price for a smartphone implies an ASP of about $85 or so (assuming $15 or a very modest 18% channel mark-up).
That means that a smartphone could be built using this chip which would have nearly half the average price of all branded phones sold last quarter.
It would also be priced cheaper than the average price Nokia charged for all its phones (75% of which were non-smart phones.)
And this type of phone could be available not in three years in three months.
The chart above shows how prices could collapse.
Of course, low price is not the only condition for the widespread substitution of smart devices in vendor portfolios. But it does take away a significant objection. It no longer seems far-fetched to say that in another two years the price points for smartphones will be low enough to make them marketable in all markets. This may in fact be true next year.
I suspect that non-branded vendors will lead the way and make these devices widely available in emerging markets. The question will then be entirely up to the branded vendors whether they will follow or will they try to market dumb phones vs. smart phones at similar price points. Will buyers opt for a branded device with no ecosystem or unbranded device with the Android ecosystem?
It becomes harder to envision any reason why non-smart devices will earn positions in portfolios two years from now.
Note that I'm not suggesting that the market for high-end smartphones is threatened yet--there is still a lot of innovation that still needs to happen to shape that market into one of mobile computing (vs. mobile phoning).
Instead, what I am suggesting is that the bottom of the phone market is very vulnerable to becoming smart. This may sound like an odd sort of disruption, but it's a very sinister threat to companies who are in the business of selling brands and not platforms.
Windows Phone 7 launched on 10 devices over 60 carriers in over 30 countries with 1.5 million of channel inventory in 6 weeks. Given the breadth of distribution, that number is not huge, amounting to less than 10k phones per operator.
Curiously, Windows Mobile was still selling in significant volumes last quarter. Maybe even higher than WP7 is selling now. In Q3 2009 Canalys reported 3.6 million WinMo units sold. In Q3 2010 Gartner estimated 2.3 million were sold through to end users. Even nine months ago Windows Mobile was running at 3.7 million units or over 1.8 million every six weeks.
Microsoft also announced they have 18,000 developers with 4,000 apps on the WP7 marketplace. That's one developer for every 83 devices in inventory.
our numbers are similar to the performance of other first generation mobile platforms...
We're comfortable with where we are, and we are here for the long run; Windows Phone 7 is just the beginning.
In terms of first generation platforms, I assume he is referring to Android and iPhone. That claim of similar volume growth is perhaps a bit too optimistic. However, he's very wrong about WP7 being the beginning for Microsoft's efforts in mobile. Not even close.
Microsoft has had mobile software products in the market for over a decade. In 2003 Gartner declared that Microsoft would sweep Symbian aside. In 2006 they were the odds-on favorites to win the mobile platform game on the basis of developer support.
Microsoft's Windows Mobile was selling more in 2003 than Microsoft's Windows Phone is selling in 2010. At the time, Microsoft also boasted of having a huge developer base (larger, in fact, than the number of users of the product; their .NET developer base being counted as mobile developers.)
Furthermore, prior to the launch of iPhone's App Store, Microsoft spokespersons scoffed at the idea that Apple could field a catalog larger than Windows Mobile which led with over 13,000 apps in August of 2008.
Dragging out these old figures isn't meant to deride Microsoft. They were not alone in failing to capitalize on early leads in mobile. Palm, Nokia, DoCoMo and Qualcomm all failed. RIM is arguably failing as we speak. Some have argued that Apple is also about to be undone by Android.
The point is that dramatic, violent change was possible even five years after foothold markets were established.
The question for today is: Is it still possible? Can a new platform still gain traction?
Microsoft is clearly betting that it can. Their seemingly quixotic attack on the market can only be justified on the basis that it's still early days. They must reason that un-penetrated markets are huge and that the existing platforms are not sticky enough to prevent switching.
At least one analyst agrees. IDC made the forecast that 32 million “Windows Mobile/Phone” devices will sell during all of 2011. I took issue with those forecasts at the time but if they deliver that volume they will get around 10% share, enough to stay on the map. If they don't then Microsoft will look more like Mobile Zune than Mobile Windows. The stakes are high.
So even though they may have airbrushed Windows Mobile from history, Microsoft's current strategy is a direct consequence of them having failed with a seemingly strong platform.
One of the most popular themes running through the mobile phone industry this year has been the unprecedented growth in Android adoption. I've argued that the adoption was initiated on the supply side by vendors and operators, but demand has certainly manifested itself.
Android is almost viral in the way it spreads. With no constraints on intellectual property, pricing, contracts, modification or terms of distribution, the incentives to push product out are phenomenal. It even works, mostly.
One hypothesis of the consequences of this viral adoption is that there will be a "commoditization" of smartphones with rapid price erosion to follow. This in turn might even lead to lower margins for Apple and RIM and most major vendors, including those selling Android itself.
In order to test this hypothesis, we need to look at what has been happening to prices. If prices have started tipping down at more than their usual rate then maybe commoditization is happening.
We can begin this test with the industry's canary in the coal mine: RIM. RIM has been struggling for growth in the very market where Android has been growing the fastest. Is RIM's pricing under pressure?
Interestingly, no. Their ASP (average selling price) decline, from an average of $350 to $310 in late 2009, came before the Android avalanche. During this year, the ASP has held steady, even rising in the last two quarters to $315 while Android activations reached 300k/day.
So I don't see a big problem with RIM, yet.
What about the industry as a whole? Can we see patterns that suggest imminent commoditization? Using the top 8 vendors (Nokia, Motorola, Samsung, Sony Ericsson, LG, RIM, Apple and HTC) and using volume-weighted ASP (total device sales divided by total units sold) we have the following chart:
Since the second half of 2007 the "industry ASP" (blue line) has actually increased. This is even though there was a huge recession in the middle of the time period.
This should be only slightly surprising. If you suspected that the iPhone may have a lot to do with that, you would be right. If you remove Apple from the mix, the second line (in orange) shows that the top vendors (ex-Apple) had some, but quite quite mild erosion (from an ASP of $133 to $129)[1].
This is far milder than what's been happening in the PC sector where prices are dropping catastrophically (According to NPD the average selling price of all Windows portable PCs has fallen from $659 in Oct. 2008 to $519 in Oct. 2009).
So Apple was a big contributor to the industry increasing its pricing power.[2] but even without Apple the industry has been holding on.
But is this just a lull?
Is Android going to stop the growth?
We can look at the pricing data one more way: If we separate the eight companies into two cohorts, the "diversified" vendors who sell both smartphones and regular phones vs. the "pure play" smartphone-only vendors, we get the following price history.
What is happening is that the diversified (Nokia, Samsung, LG, Sony Ericsson, Motorola) saw modest price declines (from $128 to $114) while the pure-players saw price appreciation (from $378 to $449). This is with the early impact of Android priced in. Unfortunately I don't have a chart showing non-smartphone prices in isolation, but I would be willing to bet it would be a significant negative slope.
In these two lines Android is not an independent variable. Android was adapted by some of the diversified vendors (all but Nokia), but in different ways. The thing is that Motorola and Sony Ericsson had great increases in ASP with Android. Among the pure-play vendors only HTC adopted Android and its performance is undistinguished vs. RIM which didn't.
So what, if anything, has Android done to pricing?
I argue that there is no evidence in the pricing data of a coming commoditization of smartphones. Android vendors were able to use the platform to move to higher pricing and the more they switched their portfolio to Android the more they got a better average price. At the same time those vendors who built smartphones without Android also saw strong price supports.
The only correlation with pricing power is whether you build smartphones or dumb phones. The more smartphones you build, the more price you can charge. This is regardless of platform.
The reason for this is that the smartphone market is growing so rapidly (90% y/y). There is limited direct competition between smartphones and a lot of competition between non-smartphones and smartphones--a battle smartphones are winning handily, irrespective of price. Smartphones seem to be what everyone wants.
So the real question that should be asked is:
Why do vendors bother making any dumb phones at all?
If you look at the third chart above you can see how attractive it must be for the diversified vendors to abandon the non-smart market to ZTE, Huawei et. al. Perhaps Nokia can still make a small profit there but to do so you need to run faster and faster toward extraordinarily low costs and prices. A point where phones cost less than everyday consumables. What keeps Samsung and LG in that game? Motorola and Sony Ericsson left once they hit profit warnings. Is that what it takes to drop what seems to be a loser business? I think not.
My bet is that by the end of 2012, it will be hard to find any branded phones which won't run a smartphone OS. Demand and supply of smartphones will race each other to overwhelm portfolio logic at the largest companies. The zero (visible) cost of Android will snowball this effect. What's even more provocative is that I believe the "others" will follow and abandon voice-oriented phones for smartphones almost immediately after the larger group.
I've long argued that the phone market should be studied as a whole because the competition is not between platforms but between smart and non-smart. Pricing is a leading indicator of what drives decision making inside vendors and it leads margin, and thence portfolio discussion. Android is expanding the market without crushing pricing. The margin expansion is what attracts more vendors and creates more demand. It's a virtuous cycle.
In a way, this is all good news--even for Apple. A world full of smartphone users is a better addressable market for iPhones than one filled with voice products. iPhone's traction was always in markets which had been seeded by some smartphones: the US with RIM and Europe with Symbian. Such a smartphone-soaked world will have better mobile broadband infrastructure, users with more demanding tastes and awareness of the value that a smart device can bring.
---
[1] The effect of "other" vendors not among the 8 listed is a big unknown. It's been estimated that they now make up as much as 30% of total volumes and that they are beginning to ship significant volumes with Android. Without visibility into that part of the market, we should be cautious. However, the eight vendors sampled here are still a significant cohort and the conclusions still appear reliable.
[2] This industry had, until 2007 suffered from chronic price erosion. Each sustaining innovation drove a mild burst of pricing power but it never seemed to last. From color screens to bluetooth, to 2.5G to 3G to MMS, to cameras to music playback, each hardware advance was not enough to keep the erosion away. The tipping point seems to be the iPhone and the shift to software as the component that drives price power.
14.2 million devices shipped, sell-through: 12.3 million
expect to ship 14.5 to 15 million units in the next quarter
ASP of approximately $315
US, UK and Canada are 56% of sales
US represented 34% of the total revenue
Last year US represented 57% of revenue
BlackBerry Torch launched in over 75 new markets, Torch launched with the $99 pricing from AT&T
BlackBerry Curve 3G launched with 118 carriers in 48 countries
China Mobile introduced BIS for small-to-medium sized businesses. The service starts at $14 per month
App World applications grew 60%
More than 16,000 applications available
2 million downloads daily
1,000 vendors registered for PlayBook apps
Revenue: $5.5 billion
Net subscriber additions: 5.1 million
Top three customers: 12%, 9%, and 9% of revenue
The same quarter a year ago: 25%, 13% and 10% of revenue
Service revenue in Q3: $835 million
Software revenue: $78 million
Gross margin in the quarter was 43.6%
Cash: $2.5 billion
For comparison, here are a select few vendors' smartphone reported shipments. RIM is the first to report and we'll be hearing the the rest by the end of January.
The number most RIM "bears" focus on is the new subscriber additions. At 5.1 million out of 14.2 million units sold implying that the new subscribers added per unit sold is 0.34, a new low.
The bulls will argue that the gross margin is healthy and slightly higher than anticipated.
My observation is that the company is finding growth outside its traditional markets. Given the figures above, the US went from $1.65b in revenue to $1.87b; a mere 13% growth while the company experienced 89% overall growth in revenues.
The following chart illustrates the situation:
Of the total increase in sales ($1.6 billion), the US contributed -15% while the rest of the world accounted for 112%.
This can be seen as positive news since RIM has been weak internationally for many years and they really need to penetrate world markets. However, a -15% growth in the US is implies significant share loss in a rapidly growing and traditional stronghold.
Andy Rubin, the executive in charge of Google’s mobile software effort, said that international expansion lay behind the latest advance. Speaking in an interview with the Financial Times, he also predicted that a boom in sales in India, Brazil, Indonesia and other emerging countries would contribute to the fast growth rate for the foreseeable future.
Quoting independent research suggesting that Android has also come to account for half of smartphone shipments in China, Mr Rubin said that the open-source nature of the software had made it popular there. However, in the wake of Google’s dispute over censorship with the Chinese government, Android handsets shipped by China Mobile, the dominant supplier, do not carry the company’s search or e-mail services.
This was already confirmed by the data published here this morning.
Verizon alone or with the other US operators cannot account for the majority of Android volumes and anecdotal evidence points out that Europe is not contributing much more.
[Goldman Sachs analyst Bill] Shope also expects both iPad and iPhone sales to exceed expectations in 2011; he sees sales of 37.2 million iPads next year, “which could potentially make Apple one of the largest vendors in the global personal computing market,” if you include both tablets and PCs.
Apparently, it's not just the crazy ones who dare to think the iPad is computer.
My forecast for iPad in calendar 2011 was set at about 33 million since last summer. I may raise it if Q4 units top 6 million.
Meanwhile...
He re-launched coverage of the stock for Goldman this morning, setting a Buy rating and $430 price target, while placing the stock on the firms “America's Conviction List.”
I don't make stock price forecasts as they are based on a random number called 'sentiment'. But by forecasting earnings and assuming a range of P/E multiples between 15 and 20 (essentially in-line or below the S&P 500) values Apple's stock at between $360 and $480 by this time next year.
Goldman's target of $430 is about in the middle of this range so I don't see it as requiring much in the way of conviction.
[ITG sent an explanation of their methodology and there is no indication that the data represents inside information.]
ITG Investment Research analyst Matthew Goodman is forecasting monthly sales record for all of Verizon's devices "based largely on our proprietary daily point-of-sale data from thousands of independent wireless retailers across the US."
Assuming the data is accurate, we are going to dive into it but I will state up-front that without confirmation, the conclusions below should be taken with a grain of salt. All statements should be read with a preceding "if the data is accurate..."
So, if the data is accurate, here is what I conclude [1]:
Verizon Has three strikes against them:
The iPhone has stolen their growth
They are facing the prospect of a single OS platform supplier
Android is not competitive vs. iOS
The iPhone has stolen Verizon's growth
The chart below shows the performance of all of Verizon's smartphones vs. the iPhone at AT&T. The area chart shows how Verizon's volumes grew from 2.7 million in Q1 to 3.3 million in Q3. Not a bad story in itself. However, the iPhone at AT&T went from 2.7 million to 5.3 million in the same time frame. Relative to just the iPhone, Verizon has been underperforming over the last quarter.
Those additional 2.4 million iPhone/AT&T activations in Q3 could be due to replacements but the same could be said for Verizon's volumes. The fact remains that iPhone alone is nearly twice the volume of all of Verizon's smartphone activations.
Just to be clear, this is a direct, apples-to-apples comparison. AT&T and Verizon smartphone performance figures are highly comparable. The two operators are highly representative of the US market. AT&T and Verizon Wireless raked in 75% of all mobile data revenue in Q2 of 2010 and account for 62% of the U.S. wireless customer base.
In addition, Verizon enjoys a larger customer base (has 92.1 million subs vs. AT&T's 90.1 million.) Over the time frame of the data the overall market did not increase dramatically therefore the conclusion that AT&T's win is Verizon's loss is plausible.
I used quarterly data so that iPhone at AT&T could be compared. But if we look at monthly data, the story gets worse:
These are absolute volume figures. You can see how RIM's fade was replaced to some degree by new vendors. However, growth hit a wall in August. Following widespread iPhone 4 availability, sales dropped. Coincidence? Perhaps, but the drop happened even with the addition of Samsung volumes.
That's strike one.
Verizon is facing diminished degrees of strategic freedom
The other notable is that even though Verizon doubled the number of vendors selling smartphones, it seems they are growing their smartphone base slower than the overall market.
Consider each vendor's share is shown below:
From three vendors to six. Shares are roughly evenly split (except for Palm) but none of these vendors are able to drive volume growth.
Consider that Motorola Droid is outselling RIM. This should be rightly noted as amazing. It plainly shows the power of Android. However that power is not something Verizon will benefit from. Quite the opposite.
Consider the share map by units and share of each OS:
Android (and WM, though that's likely to be a very tiny part of the green area) made up 75% of all smartphones sold in October. It's possible that the share could grow to 90% as RIM continues to fade.
For Verizon this would be a serious problem. Although Verizon used to have a disproportionate share of RIM's products, that OS was not enabling an ecosystem like Google's. It was a product narrowly defined around messaging. Verizon is facing the prospect of a single OS supplier who may or may not maintain alignment with Verizon's core profit algorithm. If they diverge, Verizon's bargaining power will be strictly limited.
Strike two against Verizon.
Android is barely enough to keep the battle with AT&T from becoming a rout.
In an apples-to-apples comparison, in Q3 the iPhone at AT&T outsold Android at Verizon (remember, same addressable market) by a factor of 2.5. This is with a variety of devices and vendors thrown in the market. We hardly ever get to see this finely grained a comparison when looking at platforms.
I wrote this up as a lack of competitiveness. It may seem provocative, but I define competitiveness narrowly: the competition is for a purchase decision on equal terms. These purchase decisions are fiendishly complex to predict, but the data speaks: whether it's due to brand, visibility or performance and in spite of "antennagate" the iPhone is cleaning up.
That's strike three.
The devil they know
By 2009, Verizon was probably optimistic that they could head off AT&T (and Apple) at the pass. With the vast array of vendor Android roadmaps laid out in front of them they saw a way to stem the flood of defections. I think that optimism dissipated sometime this year and was replaced by a more dreadful prospect than what iPhone presented in 2007.
It is perhaps coincidental that the rumors of a Verizon deal with Apple seem to have started in earnest right after August. It's thin, circumstantial evidence, but the only evidence we have to corroborate the data above is that Verizon has been signaling more desperation.
Reading further into the data, I would say Verizon faced these problems and decided that they had to throw in the towel. Apple may be the devil, but so could be Google. Apple was predictably evil. But Google? The devil you know is perhaps better than the one you can't predict.
What's more, the devil Apple seems to be helping your worst enemy way too much and the unpredictable one does not seem to help all that much.
Final question: how many iPhones will Verizon sell
I think this data shows that Verizon has another reason to sell the iPhone. The underperformance of their smartphone franchise is not the only determinant, but it is perhaps another straw on the camel's back.
What would happen if (or more likely when) Verizon sells the iPhone? I believe they will sell them at the same rate as AT&T does.
The data shows that Verizon sold, on average, about 3 million smartphones per quarter during the first nine months. That's about 1 million a month. That was based on three platforms, six vendors and widespread promotion.
The iPhone sold almost 4 million a quarter over the same time period.
Verizon users bought smartphones at a lower rate than AT&T users bought iPhones. This is even though the two carriers have approximately the same subs base which churns very slowly. Since a mass-market product will appeal equally to statistically equivalent populations the product should be taken-up with similar vigor.
So the question is not whether Verizon can sell iPhones at the rate of 4 million a quarter. The question is only whether these 4 million will be in addition to the 3 million that are currently buying non-iPhones.
My guess is that the 3 million run rate for non-iPhones will drop, but not to zero.
The impact on the other vendors supplying Verizon may be strongly negative depending on the level of promotion Verizon puts on the product. That promotion budget is usually fixed as a percent of sales. What Verizon applies to iPhone will be taken out of what is spends on Droid. I have always said that operators will be motivated to balance their supplier power. The promotion budget is the primary instrument to meet that end.
On the other hand, the overall market will grow so 2010's 3 million/Q will be 2011's 6 million/Q. There is plenty of room for multiple platforms.
So my conclusion remains that iPhone will find at least 8 million new users with Verizon. The analysis above give me confidence to increase the upper bound to possibly 12 million.
Verizon striking out means they need to change the way they play. The iPhone is a new ball game.
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[1] To assemble this discussion I used only the data provided in the article linked above and the officially published iPhone activation numbers from AT&T. Obtaining specific smartphone vendor volumes is a matter of reverse engineering the share chart and cross-referencing it to the table of vendor sales.
When comparing smartphone platforms it's tempting to consider the global market as unified and commonly addressable. However, when you look at individual countries some strange patterns of behavior emerge:
Indonesia, the fourth most populous country in the world (230 million people) loves Nokia's Communicator. It's the ultimate mobile status symbol.
Japan had one of the largest installed bases of Symbian phones. The version running in Japan is not compatible with versions elsewhere. Famous for its Galapagos mobile culture, the iPhone is changing what the Japanese consider the basis of phone performance.
The iPhone just became Korea's favorite smartphone even though hegemonic Samsung and LG are doing a roaring trade selling Android phones elsewhere.
The US has four incompatible 3G network technologies in widespread use. No widely distributed smartphone phone works with any two. Blackberry ruled supreme until AT&T started promoting the iPhone and Verizon started promoting Android.
Latin America loves BlackBerry. BBM is wildly popular as an SMS alternative.
Saudi Arabia loves BlackBerry. When face-to-face conversations are taboo, the BlackBerry is a social lubricant.
Australia loves the iPhone. Android is almost non-existent.
Italy has more smartphones per capita than the US. The majority are made by Nokia.
China uses two incompatible 3G technologies. The most popular (TDSCDMA) is not available anywhere else. WiFi was illegal in phones until this year.
Germany has a disproportionally large installed base of Windows Mobile
There are no Blackberries in Finland.
Although some of these idiosyncrasies may be cultural (like the Indonesian penchant for large devices) most of them are due to operator decisions. In some cases operators choose incompatible network technologies to protect from competition. In others they promote local vendors or price certain products out of reach.
Sometimes big bangs take place and demand explodes for "banned" technologies or vendors. However, it's just as easy to see how the pendulum can swing against free market choice.
Ultimately users and device vendors are at the mercy of operator decisions. In the long term operator control over platforms might diminish but it will take many years.
The difficulty in analyzing the smartphone market lies in its extremely rapid growth. With the market growing at 90% (and 400% in some areas like China) the forces of demand and supply are disconnected. It's impossible to discern whether a purchase decision is made from a choice of comparable alternatives or if it's made from a choice between buying nothing and some alternative.
Furthermore, another problem lies in distribution inefficiencies. The global phone market is nominally serving 4.6 billion consumers but they are not all participating in the same market. Devices and the services they are bundled with are not fungible globally. You cannot buy a phone is one country and easily couple it with service in another. You can't even transfer one bundle from one owner to another within the same country. Products are available only in some countries or some operators and not in others.
Commentators focusing on mobile OS platform shares assume a zero sum game and a liquid, efficient market. Both assumptions are false. They also assume that the platform is a basis for the choices made (rather than the device, the pricing illusion attached to the device, the service plan, availability, point of purchase and network switching costs, etc.)
There is data where competition for a single purchase decision by two comparable products with comparable specs and price plans can maybe show a preference. However that data is not public. Only an operator like AT&T who sells both Android and iPhone through the same channel has that data and they're not sharing.
The closest I came to analyzing this was in a blog post last May. However, that data is obsolete. Since then Android growth has accelerated rapidly as vendors who were not making smartphones (Samsung, Asian second tier, Motorola and Sony Ericsson in that order) began making smartphones in volume. Their only choice in entering the market was Android. This supply-side view of the market is much more relevant than demand-side assumptions because the market is supply constrained.
Another way to see it is this: If there is a shortage of bananas, you can't make a case for Costa Rican bananas being preferred over Honduran bananas. People will buy whatever bananas they can get (even if one may be preferred over the other). If Honduras can produce twice as many as Costa Rica then they will sell them all and it says nothing about their quality or end user preference or whether that volume advantage will be sustainable once the shortage abates.
When the iPhone vs. Android rhetorical war heats up, both sides bring up the history of Macs vs. Windows PCs. The commonly held thesis is that Windows triumphed as the PC was commoditized (and modularized). This triumph was at the expense of the over-serving and over-priced Mac.
This is a largely accurate view of what happened during the 90s. But the problem with this thesis is that (1) the PC's job has been slowly changing in the last decade (2) the Mac keeps growing faster than the PC and (3) Apple keeps capturing a vast portion of the profits in the PC industry.
These anomalies or contradictions to the thesis imply that something changed. What changed and can these changes turn the tables on the market and create an opportunity for a new computing disruption?
The PC of the 90s was hired first by companies as a productivity boosting tool and second by consumers as a way to duplicate their work productivity and communications in their personal lives.
However something changed with PCs when the laptop became "good enough". With portable computing, the job the PC was hired to do evolved. It was more important that the product be well designed (for aesthetic value, usability and reliability) than just fast and spacious. The microprocessors were plenty fast but what mattered more was low power consumption, a low profile and tighter integration with software.
The product was also purchased in a different way. A desktop could be purchased on specs alone, sight unseen, from a catalog. But a laptop had to be touched, hefted and the screen had to be observed and the whole design contemplated before a purchase decision was made. The product had an integrated keyboard, display, touchpad and storage. It was not easily serviced by end users. It was, in a word, re-integrated.
You can see how portability changed the job and therefore everything else as well. Consumer tastes became important, retail distribution became necessary and R&D resources had to be applied to solve what was no longer good enough: the whole package.
Vendors which did not prioritize design, retail and R&D were left flat-footed.
At the same time, systems software became more commoditized and productivity software became portable. The old measures of performance were being over-shot while the new measures of performance were under-served.
While this shift was underway on the hardware side, Microsoft continued to improve their product to serve more demanding business productivity jobs. Their software was not getting optimized for this new portable consumer job. They left the new market open to disruption.
In stepped the MacBook with good enough (and improving) office productivity. With excellent appeal along the dimensions of performance consumers demand most of all. It was priced higher than other laptops but the price points were affordable and, inflation-adjusted, lower than they'd ever been. It should not be a surprise that Apple was one of the first vendors to see its portables line become bigger than its desktop lines. The market evolved to the point where what Apple had was what the buyers needed.
The shift to portability is a compelling story for Apple as disruptor in the PC market. It may not result in a complete reversal of the PC hegemony but it allows Apple to grow a product line at triple the growth rate of the market. A market that was considered completely dominated by entrenched incumbents with an unbreakable profit formula.
But with the iPad Apple is clearly also aiming at disrupting the Mac (and, transitively, the PC as a whole.) The iPad can be seen as an evolution toward seamless portability; the mobile computing paradigm shift.
Apple has been contemplating a SIM card that would make carrier switching a lot easier. Sounds great, doesn't it?
"Apple is relenting," said Rodman Renshaw analyst Ashok Kumar. "They are now completely backing away from their plan to take the carrier out of the equation," said Kumar,.
This brings to mind a recent article I wrote that any talk of mobile dominance by platform vendors is bunk.
... no single platform can win a disproportionate share because it would threaten the balance of control the operators require. So talk of “dominance” of one platform or another is hyperbole. The most likely scenario is an even distribution of share between 4 or 5 competitors.
The power of distributors in the mobile phone value chain cannot be ignored. It's not fair, it's not convenient and it's not consumer friendly, but as long as networks are not good enough for mobile computing, mobile computers cannot commoditize the network.
The consequence (for those of us who try to foresee the platform game) is that operators will continue to play platforms off against each other leading to the scenario I suggest above.
