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The Hardware Monetization Paradigm
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DawnTreader
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We have a topic in the AFB questioning Apple’s pace of innovation. I’d like to start a discussion moving beyond the views about innovation in Apple’s latest product crop.
I’m old enough to remember when IBM ruled the tech roost. The computing world (in the days before mass adoption of PCs) was dominated by such tech names as IBM, Wang and Amdahl. These were giants in mainframe and mini mainframe solutions.
The focus was on hardware with software considered a low-cost or no-cost element of the product paradigm. These were hardware-centric firms that made a fortune from equipment sales.
The ascent of the PC and the lapse in understanding of the then-emerging market by hardware makers led to the rise of Microsoft which changed the monetization paradigm from a focus on hardware to high-margin software. In this new market companies such as Dell and Gateway first thrived based on manufacturing innovation and efficiencies, driving PC hardware prices ever lower. The PC had become a commodity with Microsoft and other software makers wringing high margins out of the market at the expense of hardware prices. The dominance of Windows made differentiation between hardware makers harder to establish, leading to margin capitulation by Windows hardware OEMs and success only via of high volume on thin margins.
Apple’s misunderstanding of this change in the market model nearly drove the company out of business when the CEO at Apple in the mid-1990’s remained steadfast in demanding high margins on quickly diminishing advantages in the Mac’s ease-of-use in comparison to Windows PCs. While many if not most still considered the Mac a better product, Windows was “good enough” to justify a move away from Apple’s higher-priced product.
The return of Steve Jobs to the helm at Apple and his hardware-centric focus led to the release of the iMac, the development and release of OS X (a differentiating modern OS) and new hardware devices such as the iPod and the iPhone have changed the game.
If one seeks to find innovation thriving at Apple, one only need to look at the app store and the tens of thousands of no-cost and low-cost apps. They work only on the iPhone and iPod touch, are distributed exclusively through Apple’s iTunes and move the focus back to the benefits of differentiating hardware. Apple is again monetizing the hardware market in an amazing way and in such a way that it is moving the PC and personal electronics industry back to a hardware-centric model.
This is why Dell struggles no matter how many units the company sells (there’s no quality or functionality difference to the buyer between a Dell and a PC made by any other Windows OEM) and why Amazon is pushing a hardware product such as the Kindle so aggressively. As a leading distributor of electronic books, Amazon can monetize its hardware product through the distribution of books (software) at lower-prices and in volume.
What must PO the execs at Microsoft isn’t so much that Apple has found success, but that Apple has found success by commoditizing software such as iPhone apps, gives away iLife to new Mac owners and can offer Office substitutes for home productivity such as the iWork suite at much lower cost than can work under Microsoft’s software-centric model. Add Google to the mix and Google’s low-cost or no-cost ad supported cloud-based productivity solutions and we have an industry war over the monetization model - hardware v. high-margin software v. no-cost, ad supported services. MSFT is sandwiched in the middle and is being squeezed like an orange in the juice maker.
Adding insult to injury and injury to insult, Apple is offering a refined version of its UNIX-based OS for $29 while MSFT will be on overdrive to justify high prices on Windows 7 and further pressuring its hardware OEMs on hardware margins. Add to this iPhones sold with a 2-year free software upgrades pledge and the industry monetization model has been returned to a hardware-centric model.
Apple maintains firm pricing control in its primary product markets so much so the company can maintain attractive margins while driving competitors into a price war such as the 3G iPhone at $99 versus the introductory price on the Palm Pre. Few expected Apple to debut a fully featured 3G iPhone at $99 through subsidy from AT&T. AT&T wants Apple hardware and will pay a subsidy premium to get it.
We can dicker all day and all night as to whether or not the latest crop of Apple hardware products evidence an acceleration or slowdown in innovation at this moment in time. But that’s beside the point. Apple has pushed the market back from a software-centric and software margin market to a hardware-centric, lower-cost software model in a way and at such a pace that the industry has been changed for the next decade.
This kind of innovation is almost mind-numbing when one considers the monetization opportunities and transcends the features or usability enhancements of any incremental update to existing products.
The next PC market to fall by the wayside is the netbook fad. It will fall hard and fall fast soon after Apple releases a tablet-style device that can exploit the tens of thousands of apps now available for the iPhone and iPod touch as well as provide a more than satisfactory experience for Web surfing, personal communications and electronic reading. Imagine movies, books, tens of thousands of low-cost, no-cost apps and games and the Web all on one device that rival a cheap, cramped and underpowered netbook on price.
Think for a moment before questioning Apple’s pace of innovation. Take a step back, a deep breath, look at the new monetization model and then ask yourself if Apple has slowed the pace of innovation. There’s only one answer. Obviously not!
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... The next PC market to fall by the wayside is the netbook fad. It will fall hard and fall fast soon after Apple releases a tablet-style device that can exploit the tens of thousands of apps now available for the iPhone and iPod touch as well as provide a more than satisfactory experience for Web surfing, personal communications and electronic reading. Imagine movies, books, tens of thousands of low-cost, no-cost apps and games and the Web all on one device that rival a cheap, cramped and underpowered netbook on price ...
Shrewd.
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DawnTreader
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Although I usually don’t speculate on the likeliness of new products, based on state of the PC market and Apple’s desire to expand developer investment in the platform, I suspect a tablet-style device able to run iPhone/iPod touch is a near certainty. It makes sense from a monetization model and would flatten the netbook market almost overnight.
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Although I usually don’t speculate on the likeliness of new products, based on state of the PC market and Apple’s desire to expand developer investment in the platform, I suspect a tablet-style device able to run iPhone/iPod touch is a near certainty. It makes sense from a monetization model and would flatten the netbook market almost overnight.
This has been my belief. Probably to be announced at a Sept. special event along with a new iPod Touch, available in Oct. (After the Back to School promo)
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Find my iPhone is also very interesting. It seems to be the kick off for bigger things to come from MobileMe. Probably more services that work well with the tablet/iPhone/touch.
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...I suspect a tablet-style device able to run iPhone/iPod touch is a near certainty. It makes sense from a monetization model and would flatten the netbook market almost overnight.
As successful as an Apple tablet would inevitably be, I don’t see it ever flattening the market for cheap laptops anytime soon. People will ALWAYS be attracted to a sub-$500 (or $400, or $300) laptop.
I don’t like the term “netbook”. Why don’t we call them what they really are? Cheap, small LAPTOPS. They are the same form factor, just smaller, slower, and cheaper. It’s a device that Asus and Dell have proven there is a market for. Whether it’s profitable is an entirely different discussion (and the reason Apple doesn’t offer a “similar” product).
Small, cheap laptops are successful because for the price, they are “good enough” for a lot of the uneducated computer-purchasing public. (Or they think its good enough - let’s ask them again in 2 years). Nothing wrong with that, but that’s how it is.
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As successful as an Apple tablet would inevitably be, I don’t see it ever flattening the market for cheap laptops anytime soon. People will ALWAYS be attracted to a sub-$500 (or $400, or $300) laptop.
Price is rarely the only factor that people use when making a purchase decision. For example, the wide range of price alternatives in the auto marketplace and they all have the same functionality. It is all a question of “value;” whatever that term means.
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“Once we roared like lions for liberty; now we bleat like sheep for security! The solution for America’s problem is not in terms of big government, but it is in big men over whom nobody stands in control but God.” ?Norman Vincent Peale
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Find my iPhone is also very interesting. It seems to be the kick off for bigger things to come from MobileMe. Probably more services that work well with the tablet/iPhone/touch.
I would have to agree. We have the future construction of a 1B server farm in NC, the beta of Iwork.com and new features for Mobile Me we are setting up for some large cloud based initiatives.
The other area of interest to me is the 500M investment in LG. I would assume this was to guarantee production of certain OLED displays. The upfront money gives LG the ability to finish the R&D. Back in 2008 LG inked a deal with Kodak in order to use their technology in future devices
Kodak created a 15min background video available here on OLED
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As successful as an Apple tablet would inevitably be, I don’t see it ever flattening the market for cheap laptops anytime soon. People will ALWAYS be attracted to a sub-$500 (or $400, or $300) laptop.
Price is rarely the only factor that people use when making a purchase decision. For example, the wide range of price alternatives in the auto marketplace and they all have the same functionality. It is all a question of “value;” whatever that term means.
Right, but how many $12,000 Hyundais (or Chevy’s or whatever) are sold compared to $30,000 BMW’s? Many more. And those 2 cars certainly have different functionality. But let’s get off of cars - I think they are a poor comparison to computers.
I contend that on the contrary, price is THE primary factor for many people.
I’m sure many people here have had the situation where we have been asked for our recommendation for computers (we are asked because we “know” computers, and they don’t). Many people at my work ask for my opinon. I try to explain the “value” of a Mac, and try as I might, a lot of them end up saying “thanks for the info, but Best Buy was having a sale and I got a laptop for $699”. It is my firm belief that price is by far the largest factor for a certain segment of the computer-buying population. Which is why they will continue to have bad experiences with cheap hardware. Over time, (we’ve already seen it start) more and more people will start to see the “value” in the computers they are purchasing, but there are SO many people that don’t bother to think this way.
Therefore, the sub-$500 laptop market isn’t going away anytime soon. (Again, I don’t think this is bad for Apple…they purposefully avoid these types of consumers.)
Edited: I apologize for this being a little off-topic, perhaps I should have started this discussion in different thread.
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FlipFriddle
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Find my iPhone is also very interesting. It seems to be the kick off for bigger things to come from MobileMe. Probably more services that work well with the tablet/iPhone/touch.
I would have to agree. We have the future construction of a 1B server farm in NC, the beta of Iwork.com and new features for Mobile Me we are setting up for some large cloud based initiatives.
The other area of interest to me is the 500M investment in LG. I would assume this was to guarantee production of certain OLED displays. The upfront money gives LG the ability to finish the R&D. Back in 2008 LG inked a deal with Kodak in order to use their technology in future devices
Kodak created a 15min background video available here on OLED
HereI hope Kodak didn’t mess up their licensing this time. My hometown and former largest local employer needs a shot in the arm.
DawnTreader you are a wizard. I agree with you. Thanks for laying it out so succinctly. Very nice post; it’s like you should do that for a living or something….
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Less is More (more or less).
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That’s a keeper, DawnTreader—thanks.
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That post is the reason I tend to be a lurker/reader than a contributer. I would never have looked at the Apple’s innovation in that light. Thanks
Phil
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[quote author=“dc930” date=“1244839889"Therefore, the sub-$500 laptop market isn’t going away anytime soon. (Again, I don’t think this is bad for Apple…they purposefully avoid these types of consumers.)
Those who know me also know I’m a ‘typical’ Apple customer, but I absolutely LOVE my Dell Mini 9 netbook. I just got tired of waiting for Apple to put something together. This machine gives me the portability and power that was available in no other machine I’ve owned, expect perhaps the Powerbook 2400c (at the time). Software is Apple’s loss leader, and they’re getting things lined up to vacuum the remaining market segments at a time and place of their choosing. That’s their genius.
[ Edited: 13 June 2009 09:27 AM by rezonate ]Signature
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DawnTreader
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I said the netbook market will fall hard and fall fast. I didn’t say it will disappear. Here are some of the points:
A device that sell at or below the cost of a netbook.
Can use tens of thousands of no-cost/low-cost iPhone/iPod touch apps.
Fully integrates with MobileMe.
Provides a more than satisfactory experience as a Web news reader and an eBook reader.
Can play movies and other entertainment content rented or purchased through the iTunes store.
This device will expand the market for developers, provide an an attractive alternative to a cheap netbook and exploit the chip technologies Apple has under development.
The best way to continue the strong growth of the Apple eco-system is to expand the accessories, peripherals and software market for Apple products.
By producing yet another well-designed product that takes advantage of low-cost software from developers, Apple further monetizes its hardware and further positions the software development market for low-cost, high volume software sales avenues.
Look at it another way: The development timeline and development processes for iPhone and iPod touch apps require a fraction of the resources needed for full-blown PC applications. Apple is creating a large market for apps that can be delivered to consumers quickly and distributed easily through the app store to tens of millions of device owners.
The developer community for Apple hardware devices will increase exponentially with a much quicker ROI and development resources than ever before.
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(comments about potential hardware/market)
I’m right there with you. I’ve been advocating for a kindle-like effort from Apple on this board since 2005. I love seeing some of the biggest detractors from then as the biggest supporters now. An idea who’s time has come. If/when Apple does release something in this format, it well certainly work well without a keyboard, and I’ll certainly upgrade. Until then, I have my long-awaited third screen. Very sweet.
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