(Originally published December 20, 2010)
Amid Android's strong success in 2010, Google has been hard at work preparing its "silent killer" attack on the highly concentrated PC operating system market. This was originally announced in July 2009, with further clarification by November 2009. I saw it clear as crystal then, but it was too early for an investment theme. It may still be a little too early, but here it is.
Microsoft's worst nightmare has just started its six-month test-run. Earlier this month, Google began to distribute a pilot batch of laptops running its PC operating system called Chrome OS. The feedback provided by these thousands of users will form the basis for commercial availability from multiple well-known PC hardware makers around the middle of 2011. By 2012, one should expect almost every single PC hardware maker to offer laptops and desktops with Chrome OS.
This is not a review of Chrome OS. I could write one, but why re-invent the wheel, when outlets such as Laptopmag.com have written excellent ones in which I have little to add? Instead, this piece focuses on the broader market implications of this new product.
Let's step back for a second. What are the biggest costs of buying and owning a PC? First, it's buying software. A new PC can be as little as $300, but the basic Microsoft productivity suite -- Office -- can be $200 to $300. A three-year, in-home service contract can also run almost as much. Now that $300 PC is $700.
Once you have bought your PC, the software and in-home service warranty, the most expensive part of the equation starts: time. If you are an employer, you will have to employ an IT staff in order to deal with issues such as printer driver set-up, virus disinfection, application installs, "things that just don't work" and so forth.
But the main cost here is time. How many hours do you spend over the phone with tech support over a PC's three-year life span? I know I spend on average of over one hour a month.
One hour a month over three years? That's 36 hours. What's a price for an hour in average America? $25? Minimum wage is below $10, but a lawyer can be $500. It's obviously an individual issue, but at $25 that's $900 over three years. So let's tally this up:
PC -- $300
Microsoft Office -- $200
Three-year tech support -- $200
Wasted time -- $900
Total -- $1,600
This is the real situation faced by many individuals and IT departments alike -- a $300 PC really costs $1,600. Let's cut straight to the bottom line here: What Google promises to do for many types of users is to dial that $1,600 expense right back to the original $300, or an 81% savings. That's music to anyone's ears -- except Microsoft's.
For those who say I am skipping the obvious, let me explain how Google accomplishes these savings. Basically, Chrome OS hides from the user all of the complexities of managing a PC. Chrome OS seems to basically make it impossible to foul up the PC, making any need for maintenance and tech support obsolete. Google also includes access to its productivity suite, competing with Microsoft Office.
Wait a minute! Doesn't this sound like an Apple iPad? It sure does, but despite the many similarities, there are also important differences for now. First of all, an iPad isn't shaped like a traditional laptop or PC, but that could change in coming months or years. Second, an iPad requires a full PC in order to activate and operate properly -- but that too could change soon. An iPad stores things -- apps and data alike -- locally, but Chrome OS could also evolve in time for commercial launch from "pure cloud" to a "hybrid cloud" architecture, just like Google itself used to do with its Google Gears product.
You can see a pattern here. Apple and Google are ganging up on Microsoft with products that are "idiot-proof" and therefore much more pleasant to use for many people. These two approaches have significant differences today, but are likely to look more similar two years from now.
Google Chrome OS, though, isn't for everyone yet, just like an iPad doesn't replace a PC for most people. For example, people who need high-performance scientific apps, or use it for gaming, will not go for Chrome OS. But many people will be well- served by Chrome OS when it becomes available to the public. Examples include students, general worker bees in the white collar corporate world, and elderly people. The PC tech support costs in schools and enterprises are huge, and how often have you received a call from an elderly relative asking for PC help?
I think that as soon as Chrome OS can be refined within one year from now it has a shot to take more than half of the Microsoft Windows/Office market. Yes, you read that right. I believe that the "special cases" needing the full power and flexibility of the current Microsoft PC portfolio are a minority of the market. Having used the first Google Chrome pilot project laptop for a week or so now, I can say I'm one of them. Yes, the product isn't ready for prime time today, but I think it will be in as little as six months from now. It's not hard to see, at least to me.
If you are Microsoft, what do you do? In theory, Microsoft could simply copy Google's Chrome OS in terms of its revolutionary cloud architecture. The problem is that Microsoft would lose almost all of its revenue and profit margin. Google can do this because it makes up for it with search and advertising. Microsoft doesn't seem like it will be able to make those numbers work anytime soon. Rarely have I seen a bigger problem for a company: It's a combined technology and business model shift. Remember what happened to AOL after 1999?
What about Apple? Its iOS platform is onto an alternative approach at replacing the traditional PC, and is therefore likely to continue to gain significant ground against Microsoft. That said, Apple faces a similar problem to Microsoft for its Mac laptop/desktop business. Seriously, could this mean Apple will someday become a Chrome OS licensee as well? Apple will want to avoid this, but its hand could be forced into making the option available, in order to remain relevant and hold market share. As crazy as it sounds, I wouldn't bet against it. No, it won't happen in 2011, but perhaps in 2012 or 2013.
Speaking of 2012 and 2013, that's when Chrome is likely to start eating into Microsoft's market share and profit dollars materially. Next year will still be a year of testing and early adopters, but Chrome OS will be waiting to blossom.
These technology transitions typically take at least five years to fully play out. Microsoft isn't going away any time soon. But how does Microsoft get out of the death grip of the Google Chrome OS challenge that will start unfolding over the next year?
Thursday, December 23, 2010
Friday, December 17, 2010
Pundits Fail to Read RIM
Yet another beat-and-raise quarter from Research In Motion keeps the pundits scratching their heads. This shouldn't be happening: "I went into my local Verizon store last month, and they told me Android is outselling Blackberry almost 10:1. How could RIM beat and raise?"
This reminds me of the reaction to the 2004 election when left-wing activists in San Francisco and Manhattan scratched their heads in surprise over George Bush's big win: "I don't know a single person who voted for Bush, so how could he win by 3 million votes?" If all the people you poll are on the Upper West Side or the UC Berkeley campus, well...
There was so much commentary on CNBC repeating the mantra that RIM must really be doing poorly because Apple iOS (iPhone) and Android are beating it everywhere, that I forgot to count the instances. So with RIM beating and raising yet again, what is it that these pundits don't understand?
First, these pundits don't realize that in most of the countries of RIM's main competitor is not Apple or Android, it's Nokia. The Finnish company has about one-third of the world unit market for mobile phones, even though its market share in the U.S. is very close to zero. This means that in many countries, Nokia constitutes close to 50% of the market.
The U.S. smartphone market is uniquely warped, as Motorola CEO Sanjay Jah rarely forgets to remind us. In the U.S., almost all high-end smartphones sell for $200, while there is a second tier around $100 and then others at zero, all with a two-year contract.
Considering that most smartphone monthly bills run about $100, or $2,400 for two years, the upfront price difference is peanuts. Who cares if it's $200, $100 or zero upfront, when I'm really paying $2,400 after that?
As a result of this warped U.S. pricing, the market has tilted heavily in favor of the smartphones most expensive to manufacture, most notably the iPhone and high-end Androids. Why not get the best for only $200? This means RIM is more challenged in the U.S. market.
In most parts of the world, however, there is no effective credit system. As a result, carriers don't subsidize smartphones in exchange for a contract. In those countries, consumers buy smartphones by paying "full price" (typically a price close to manufacturing cost) and then pay-as-you-go. For the smartphone buyer in, say, Indonesia, here is what his choices may look like:
Nokia -- $150
BlackBerry -- $250
Android -- $450
iPhone -- $700
For this Indonesian consumer, who may be spending $40 a month on mobile communications services, this now becomes a meaningful price difference, unlike in the U.S. market. A BlackBerry is a relatively easy step-up from his old Nokia, and it's ideally suited for SMS, which is the only non-voice service he may be using.
RIM is growing primarily because it is crushing Nokia in most countries around the world, in terms of market share shift. These RIM gains don't look to abate for at least the next couple of quarters. The fact that Android and Apple are also gaining is beside the point because Nokia's massive losses outside the U.S. means RIM can feast from Nokia's share decline in at least 100 to 150 countries around the world.
Of course, RIM has fundamental product challenges that will need to be addressed very soon. RIM's new OS launches in March with attractive 3G/4G support by the second half of 2011. This will include a similar shift for RIM's smartphones. RIM will have to fight hard in order to attract competitive developer support in the battle, not only against Android and Apple, but also Microsoft and Hewlett-Packard.
If RIM doesn't succeed in this transition, or the transition is delayed, RIM will eventually have a huge existential problem.
In the meantime, however, pundits will have to learn how markets outside the U.S. work in order to better predict RIM's demise as evidenced by their local Verizon stores. And keep in mind, RIM's guidance for the February 2011 quarter doesn't include a penny's worth of PlayBook (tablet) revenue, although it includes all the associated expenses. What does this say about the upside potential for the May 2011 quarter?
This reminds me of the reaction to the 2004 election when left-wing activists in San Francisco and Manhattan scratched their heads in surprise over George Bush's big win: "I don't know a single person who voted for Bush, so how could he win by 3 million votes?" If all the people you poll are on the Upper West Side or the UC Berkeley campus, well...
There was so much commentary on CNBC repeating the mantra that RIM must really be doing poorly because Apple iOS (iPhone) and Android are beating it everywhere, that I forgot to count the instances. So with RIM beating and raising yet again, what is it that these pundits don't understand?
First, these pundits don't realize that in most of the countries of RIM's main competitor is not Apple or Android, it's Nokia. The Finnish company has about one-third of the world unit market for mobile phones, even though its market share in the U.S. is very close to zero. This means that in many countries, Nokia constitutes close to 50% of the market.
The U.S. smartphone market is uniquely warped, as Motorola CEO Sanjay Jah rarely forgets to remind us. In the U.S., almost all high-end smartphones sell for $200, while there is a second tier around $100 and then others at zero, all with a two-year contract.
Considering that most smartphone monthly bills run about $100, or $2,400 for two years, the upfront price difference is peanuts. Who cares if it's $200, $100 or zero upfront, when I'm really paying $2,400 after that?
As a result of this warped U.S. pricing, the market has tilted heavily in favor of the smartphones most expensive to manufacture, most notably the iPhone and high-end Androids. Why not get the best for only $200? This means RIM is more challenged in the U.S. market.
In most parts of the world, however, there is no effective credit system. As a result, carriers don't subsidize smartphones in exchange for a contract. In those countries, consumers buy smartphones by paying "full price" (typically a price close to manufacturing cost) and then pay-as-you-go. For the smartphone buyer in, say, Indonesia, here is what his choices may look like:
Nokia -- $150
BlackBerry -- $250
Android -- $450
iPhone -- $700
For this Indonesian consumer, who may be spending $40 a month on mobile communications services, this now becomes a meaningful price difference, unlike in the U.S. market. A BlackBerry is a relatively easy step-up from his old Nokia, and it's ideally suited for SMS, which is the only non-voice service he may be using.
RIM is growing primarily because it is crushing Nokia in most countries around the world, in terms of market share shift. These RIM gains don't look to abate for at least the next couple of quarters. The fact that Android and Apple are also gaining is beside the point because Nokia's massive losses outside the U.S. means RIM can feast from Nokia's share decline in at least 100 to 150 countries around the world.
Of course, RIM has fundamental product challenges that will need to be addressed very soon. RIM's new OS launches in March with attractive 3G/4G support by the second half of 2011. This will include a similar shift for RIM's smartphones. RIM will have to fight hard in order to attract competitive developer support in the battle, not only against Android and Apple, but also Microsoft and Hewlett-Packard.
If RIM doesn't succeed in this transition, or the transition is delayed, RIM will eventually have a huge existential problem.
In the meantime, however, pundits will have to learn how markets outside the U.S. work in order to better predict RIM's demise as evidenced by their local Verizon stores. And keep in mind, RIM's guidance for the February 2011 quarter doesn't include a penny's worth of PlayBook (tablet) revenue, although it includes all the associated expenses. What does this say about the upside potential for the May 2011 quarter?
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