Saturday, October 13, 2012

The Rock, Paper, Scissors of Gadgets

There are three ways to make money on consumer hardware: you can charge more than it cost, you can attach a service and cover the hardware cost with service charges, or you can use the hardware as a vehicle to sell content or other products. There is nothing that says that you cannot do all three. However, in a competitive environment, the three different strategies tend to nullify each other. With cellular phones, the model had previously been to give the phone away at cost in order to get the consumer to sing a service contract. The problem with such a model is that when you are giving away the hardware, every component of the hardware is cost. Such platforms tend to not be a font of innovation as new or upgraded components means more costs. The incumbent hardware is highly vulnerable to new entrants that offer new capabilities and upgraded performance; the hardware rock breaks the cost cutting scissors of service subsidized hardware. The top cell phone makers during the free cell phone era are now struggling as the cost reduction race has tuned into an innovation race.

With hardware being rock and services being scissors, content becomes paper. The willingness of the content owners to support a hardware platform can make or break that platform. Disney’s decision to support Blu-Ray rather than HD-DVD spelled the end of HD-DVD. The video content owners’ reticence to sign an agreement with Apple seems to be a stumbling block for the much rumored Apple TV set. Paper covers rock.

The FCC with its “must carry” rules and the FTC with its antitrust enforcement makes it difficult for service providers to refuse content. So, scissors rarely cut paper, at least as far as content is concerned. However there are some examples and there may be more as the diversity of delivery mechanisms for content and product expand. As if it were a secret, Amazon made known that it is selling the Kindle at cost. The Kindle is clearly a sales vehicle for third party content and product. It has drawn a response from Walmart, which is ceasing to carry the Kindle. Indeed it would not be out of the question for Walmart to offer its own Tablet or to seek some linkage with a competing tablet maker.

Going forward, there are a variety of ways “rock, paper, scissors” could play out. As the OS owners, the managers of competing ecosystems, try and triangulate among products and services, a variety of either matching or blocking moves may occur. Microsoft is making closer ties with Barnes and Nobel. There is some speculation that tablets might get offered for free. This is ongoing in the smart phone and tablet markets. It would not be unreasonable to expect the battle to spill over into TV. Indeed, TV may be as big a prize as any.

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