industry analysis – Page 3

Tablets: Numbers and Observations

Both IDC and Display Search released updated numbers for the tablet segment. There are some interesting key take aways from both sets of numbers.

IDC confirms Apple’s dominant position with regards to iPad share and points to slumping Android shipments for tablets which is no surprise. The Display Search data is a bit more comprehensive which includes forecasts as well as OS share in the press release.

There is one thing that sticks out to me and it is related to Windows 8. In the IDC press release they make it clear that Windows 8’s impact is too early to tell. Whereas Display Search takes a stab at forecasting share for Windows 8 and RT but gives the advantage to Windows RT over Windows 8. This is interesting because it implies that from Display Search’s standpoint they do not have much confidence in Windows 8 on X86 but have some confidence in Windows RT to gain some traction in the tablet market.

If you look at the updated numbers from all the major forecasting firms, it is becoming clear that most, if not all, acknowledge that the tablet market could be larger than the notebook and desktop market. Regardless of your belief on that point the bottom line is that tablets and smartphones are the only real growth segments of the computing industry. IDC still is committed to calling all tablet “media tablets” which I think is wrong. There is no doubt at this point in time that tablets are computing platforms not just media consumption platforms.

In Display Search’s numbers, I think they are being overly generous to Android given the trouble it has said so far in tablets. I personally tend to believe that Windows 8 or Windows RT has more of a chance in the tablet market to succeed.

I still remain convinced that Apple will remain the undisputed leader in tablets due to the iPad becoming the standard in terms of tablet computers. In this release, my friend Richard Shim rightly points out that as the tablet market matures there will be opportunities for segmentation within the sector as vendors carve out differentiation.

As with all forecasts we have to take them with a grain of salt to a degree. Things can change quick and a couple of factors, like subsidization, could drive tablet shipments much faster than is currently being forecasted.

The bottom line is, vendors who are not establishing a tablet strategy may very well be left out of one of the hottest segments of computing we have seen in some time.

Reports of Apple’s Demise are Greatly Exaggerated

The past few weeks have brought out some interesting commentary around the imminent decline of Apple. Yesterday perhaps the most forceful view yet came from Forrester’s CEO, George Colony.

George and others root their argument on the absence of Steve Jobs to influence vision, leadership, and charisma. There is absolutely no doubt that Steve Jobs is irreplaceable and that his vision and overall product decision making helped make Apple what it is today. That being said, he didn’t do it alone and more importantly, the culture of innovation he created internally at Apple is what is unique to Apple and the central part of Steve Jobs legacy. Management theories backing up George’s and others claims are just that theories, and they may be generally true but they are not universally true.

I have written quite extensively about why Apple is poised to remain dominant for quite some time so I won’t go over all those points again. Quickly, however, Apple’s fundamentals as a vertically oriented organization, retail strategy, brand, marketing, ecosystem, and more, are fundamentals that don’t go away just because Steve Jobs is no longer with us. For my thoughts on that specifically, I welcome you to these columns. For this topic I’d rather focus on Apple’s culture as I think it is a point that is broadly missed.

A Culture of Innovation

I have a number of good friends at Apple in positions up and down the organization. There is a culture internally at Apple that I don’t see anywhere else inside large organizations. The only way to explain it is to use the analogy that the energy, excitement, and passion with employees inside Apple is like that of a startup. Steve Jobs has even used this analogy himself. The conventional wisdom is that once a company reaches a certain size that startup energy goes away and generally that is true, however, this is not the case internally at Apple.

Even in a recent interview with Apple’s SR VP of Industrial Design, Sir Jonathan some very telling differences about Apple’s unique culture came to light. He made a specific statement:

“Our goals are very simple – to design and make better products. If we can’t make something that is better, we won’t do it.”

That may seem entirely obvious and of course this is not a goal unique to Apple. However, Apple’s definition of “better” is different from their competition. Their definition of better is based on their drive to make better products that “they” want in their life. Apple employees are not content with just “OK” products. Steve Jobs was the ultimate end user with a keen eye for user experiences but I would argue that there are thousands of people at Apple who think the same way because that is the culture Steve Jobs created. For Apple employees, to make things better, and make products they enjoy is the only real competition Apple needs. What’s more, Apple’s three-businesses-in-one orientation around hardware, software, and services is what enables Apple’s definition of “better” to become reality.

Can that Culture be Sustainable?

If there was an argument against this thinking it would be that because Steve Jobs is no longer there driving that culture and passion through his charisma, it cannot be sustainable. This is in essence the root of the inevitable Apple demise argument. I agree there are plenty of examples where a charismatic leader is no longer in the picture and the culture is not sustained. But, there is another Steve Jobs company in which he was the CEO, set the culture, and then departed where this culture has also been preserved and it is still intact and flourishing today and that company is Pixar. Pixar thrives because Steve Jobs’ vision was instilled in John Lassiter and his team and he left them a rich framework in which to continue to innovate and grow.

It is interesting to me that those who use the post Steve Jobs argument about Apple’s demise never mention Pixar. I read one of the most fascinating case studies of Pixar in the Harvard Business Review several years ago. It contained many interviews with employees and countless examples of the pains they went through to make a consistently better product and maintain a consistent high quality bar of everything with the Pixar name on it. Pixar employees were not content with just “OK” movies and nothing went out that door that didn’t meet a certain bar. This is a culture that was driven by Steve Jobs internally at Pixar. Although Steve Jobs may have not had the same kind of product impact since movies are different than computers, it is that culture he specifically drove in both Pixar and Apple and they remain intact.

That culture attracts a certain type of person. Again some may balk at comparing a company like Apple to Pixar due to the creative and artistic work of Pixar; however, I think Apple attracts equally creative and artistic employees.

Disney at large is another interesting case study. I have heard this company used in these examples but with a missed perspective. It is true that since Walt Disney left that the successive management teams have had their ups and downs. However, there is a philosophy, outlined nicely in a book called “The Disney Way”, which maintains a consistent experience with Disney products. This is why the experience at Disney theme parks, cruises, etc., has no equivalent. That philosophy and culture created by Walt Disney still remains intact today and is still evident in the Disney experience. Even with that in mind there are still huge differences between Disney and Apple. Disney had lost its drive to innovate around animation and they fixed that by buying Pixar.

Apple is a company is filled with thousands of people who aren’t content with the status quo and drive to push the bar higher making every successive product better. That is something I don’t see elsewhere in the industry. That culture is one that runs extremely deep inside Apple and is likely to keep them growing well into the future.

I could see George’s and others point if Apple was just another company. I simply don’t believe Apple is like any other company. Apple is different because they think different and that is not going away any time soon.

Why Google Will Use Motorola To Become Vertically Integrated

If you look closely at the most successful company in tech today, it is Apple. And they are in this position for a major reason. They are completely vertically integrated. They own the OS, the hardware and the ecosystem. And although they don’t manufacture their own chips, the IP in their chips are homegrown and designed to meet the needs of their advancements in OS and hardware designs. The result of this vertical integration is that they have complete control of their future.

Another company that is pretty much vertically integrated is Samsung. They do their own design, their own chips, and in their case they even do their own screens and manufacture their own products. Their only weak link is with the OS since they are licensing Android for their smartphones and tablets. However, they are about to launch their own cloud services and take even more control of their destiny by tying all of their products together to cloud based applications and servers. And as you know, they have gained great ground in smartphones and while still struggling against Apple in tablets, they have become more aggressive in looking at alternative operating systems to Android and could soon deemphasize their use of Android in favor of their own OS solution to guarantee even tighter vertical integration in the future.

But there are two companies today that at the moment have very little control of their future because of their lack of vertical integration and that is Google and Microsoft. And without out being vertically integrated, their prospects of wide spread success in the future in my viewpoint is highly questionable.

The Vertical-ization Trend

Ironically, at the moment, Google is actually in a better place than Microsoft to develop a vertically integrated strategy but Google is in denial about how important this is to their future at the moment. In their case, they own the software OS and a lot of the services layer but have little control of the hardware and the marketing needed to guarantee that Android will be successful in the future. In fact, if you read a lot of the recent posts about Android, you see numerous reports that suggest that Android is in trouble and losing ground, especially in tablets.

Today, Google has to completely rely on their Android hardware partners to drive Androids success. While this has been OK with smartphones, their partner’s performance in advancing Android in tablets has been dismal. Now to be fair, a lot of this is Google’s fault in the way they have handled the various versions of Android and the uneven, if not disastrous way they handle upgrades and OEM relationships.

But Google is about to have an even bigger problem on their hand when it comes to partners. To date, Android has been the only game in town when it comes to alternative operating systems for smartphones and tablets. But that is about to change. With Microsoft now entering the market with Windows based operating systems for smartphones and tablets, these vendors now have a solid alternative to Android. And pretty much every one of them will be doing a Windows Tablet. And with doing a Windows Tablet comes major marketing dollars from Microsoft as well as huge industry interest for this tablet platform since it includes backward compatibility with existing Windows Apps.

This means that Google has even less control of their partners push for any Android tablets and this probably translates into Android tablets in general losing steam. Sure, Amazon will continue to use Android and in a sense advance Android in tablets. But their version of Android is their own amalgamation of the Android OS and their own special tweaks and in no way really advances Android itself in the market.

Now, when Google is asked about their Motorola purchase, they say it was for the patents and they plan to treat Motorola just as if it is another Android vendor and not give them any preferential treatment. Well, if you buy that, then I have bridge in NYC that I want to sell you very cheap! I believe Google knew full well that at some point Android could become really challenged and that their vendors could desert them. So the Motorola purchase was insurance. At first they could just gleam value from the patents and hope that this alone was worth the price. However, having Motorola in their backpocket that would let them become vertically integrated at the turn of a switch was the real goal of this acquisition.

Now, in my opinion, it is not a question of “if” they make Motorola their hardware arm. It is a matter of when and I believe that this will happen this summer. Put yourself in their position. By the fall, all of their key Android vendors will also be backing Windows 8 and you can be sure that this will be the beginning of these vendors de-emphasizing their Android products. Google better be ready to pick up the ball with Motorola by then or their ability to control their own destiny will take a real hit given the momentum that will come in Windows 8 tablets this fall.

More Acquisitions Will Happen to Go Vertical

A week before Google bought Motorola, my son Ben wrote an article in Tech.pinions arguing that Google should buy Motorola if they wanted to control their destiny. Although Google continues to deny that it will make Motorola its hardware ARM, both us believe that Google has no choice if they want to see Android succeed for their own purposes.

Related Column: Why Google Should Buy Motorola

So what about Microsoft and this issue of vertical integration? Aren’t they also completely beholden to their OEM partner’s to carry out their OS dreams and must trust them to be successful in hardware if Windows 8 on tablets and Windows Phone are to be big winners? Absolutely. Their model of using vendors for Windows 8 on desktop and laptops is intact and will succeed on its own. And perhaps even with tablets this will be the case since Windows 8 backward compatibility will be a big driver for these products and all PC OEMs will use this to extend their reach in tablets. But where Microsoft is very vulnerable is in smartphones since they pretty much are relying on Nokia to make Windows Phone–and beyond–succeed in these devices. Early this year, I wrote an article in Tech.pinions saying that Microsoft “will” buy Nokia and reasoned that in the end, when it comes to smartphones, Microsoft is so late in the game that ultimately they need to control its hardware destiny.

Related Column: Why Microsoft Will Buy Nokia

With the news last week that Nokia lost $1.9 billion last quarter and rumors of bankruptcy swirling around them, I am more convinced then ever that Microsoft will buy at least Nokia’s handset business. Although Nokia officials have denounced reports of bankruptcy, if they have another bad quarter their long-term position in the market could be even more questionable. In the end, Microsoft will have to be at least vertically integrated when it comes to smartphones if they want to guarantee the ultimate success of Windows phones.

Take a close look at why Apple is successful and you will see that their vertical integration allows them control their entire ecosystem and as a result, be master of their destiny. I don’t see any way for Google or Microsoft to ultimately control the success of Android in tablets and Windows Phone/8/9 on smartphones and tablets without becoming vertically integrated in these areas. If they do not do this, Apple will continue to eat their lunch and leave them in the dust.

Apple TV and the Trojan Horse Strategy

Apple TV is one of the things I get asked quite a bit about during my industry analysis presentations. It seems that everyone out there wants to know what Apple has planned for the big screen. Although no one knows, and there is much speculation, my key thoughts about this all along have been that Apple will in some way turn the TV screen into a platform to deliver rich content and services. If you think about it, the TV screen is the last of major screens in consumers lives to truly become a smart. Many vendors have tried, but the technology in many ways is still not here to really make TV’s smart.

I believe there is a tremendous amount of interest in Apple’s moves in this area because of the massive opportunity to re-invent what we experience through our TV. But the opportunity is much larger than simply consuming video content in new ways.

A Platform Unlike Any Other

The untapped opportunity for the large piece of dumb glass sitting in hundreds of millions of consumers living rooms and bedrooms is to create the ultimate entertainment platform. This is a big deal if you think about it. Today most platforms are computing platforms where things like entertainment are secondary to things like productivity, communication, etc. This is what has always intrigued me about game consoles. I have felt from very early on in my digital home research that game consoles were the ultimate entertainment platforms which would evolve into trojan horse entertainment gateways for more than just video gaming. With many of the updates brought to both the Playstation and the XBOX, it is clear that this is exactly what is happening. In fact, I believe that the value of game consoles for today’s and perhaps even future consumers, will be less about gaming and more about other entertainment services.

That being said, gaming is an important part of living room entertainment. That is why I believe Apple is betting seriously on gaming across all of the screens in which they compete. Game Center for Apple becomes the glue tying consumer gaming experiences together and the foundation of a gaming service akin to XBOX Live. A holistic video game strategy both immersive and casual is key to the future of Apple TV as an entertainment platform.

A Set Top Box is a Trojan Horse not a Large Piece of Glass

I will believe that Apple is making a large piece of glass when I see it. In my opinion the current strategy with Apple TV is that it is a small, yet powerful, set top box and is their best plan of action. Mainly because there is absolutely nothing that can be built into a large piece of glass that can not also be accomplished with a small, yet powerful, set top box. If Apple wants to sell hundreds of millions of Apple TV’s it will accomplish this with a set top box not a large, and expensive, piece of glass. Even if Apple does decide to sell a large piece of glass in the shape of a TV, they would still have to employ the Apple TV set top box strategy in order to provide an identical experience to the hundreds of millions of consumers who already have large pieces of glass and don’t intend on buying a new one any time soon.

Interestingly, Microsoft is in a position to compete when it comes to entertainment platforms. The XBOX 360 is much more than a gaming console and is evolving into a fairly mature entertainment gateway. The XBOX 360 has been called a trojan horse before and I believe it is but Microsoft can not sit still.

We may analyze and probe from every angle Apple TV in its current implementation and yet I don’t believe Apple or Microsoft has yet implemented the key growth features for this category–namely apps. The next frontier of the TV platform is to let developers begin to invent new applications and software designed specifically for the large screen. This does not mean a repurposing of existing apps and blowing them up to fit on a larger screen. It means re-inventing the way we think about software and entertainment experiences for the big screen Similarly, touch computing required a new software development paradigm built from the ground up to work with touch; so I believe the TV needs software purposely built for that screen and its role in consumers lives.

What makes the TV fascinating is how different of a relationship consumers have with it versus other screens, or platforms, in their lives. For example, the TV is not a personal screen like a notebook, tablet, or smartphone. The TV is a communal screen where in a family environment it is enjoyed by multiple people simultaneously. In this scenario it doesn’t make a ton of sense for me to run Twitter or Facebook, or at the very least those aren’t the most interesting applications for the TV. What gets me excited is that when the TV becomes a platform for software developers to take advantage of, I believe we will see an entirely new set of applications developed with more communal experiences in mind.

The family or communal cloud will become an important ingredient in this scenario. I wrote about the need for more family and communal clouds last week and the more I think about it the more I am convinced it is an unmet need in the market. Communal screens will require communal content and that is when the family’s digital media becomes an important part of the experience. The experience of seeing up to date photos of loved ones and family members (of my choosing) on my TV is one I feel would be of great value.

Lastly, I would add that although I believe Apple TV is a trojan horse, I am not convinced Apple has yet employed the strategy fully. I think this is where gaming and apps will come in to round out the platform. I know we want to kick our cable providers to the curb but I don’t think that is the entry point. I believe games and apps will deliver the value propositions that get the Apple TV trojan horse strategy going. Then once in the door in masses, hopefully the Hollywood industry will begin to invest in business models that will keep them from extinction in the future.

How Apple is Cornering the Market in Mobile Devices

I have been speaking with various vendors of tablets lately and more than once, the topic of Apple “iPodding” them has come up. iPodding basically refers to the fact that although Apple has had the iPod on the market for over 10 years now, they still have over 70% of the MP3 portable digital music player market. This fact is giving many of the tablet vendors nightmares. Although they see this tablet market as a very large one and believe there is room for multiple tablet vendors given the potential market size and potential world wide demand, they know very well that Apple has done a great job in cornering the MP3 player market with iPods and are afraid that Apple could do the same with tablets.

And even though Apple has not cornered the market in smartphones, all are amazed that Apple had record iPhone sales last quarter and realize that Apple has just started selling iPhones in the Chinese market and could be expanding to other BRIC (Brazil, Russia, India, China) countries too. And many of the smartphone vendors are certain that Apple will bring out a lower cost iPhone at some point and get very aggressive in emerging markets within the next two years. An even harder fact for them to swallow is that when it comes to smartphone profits, Apple takes about 75% of all profits made in cell phones.

While all of them think that they can compete with Apple when it comes to hardware, and maybe even software, what they all pretty much know is that the secret to Apple success is that they have built their hardware and software around an integrated ecosystem based on a very powerful platform. And it is here where their confidence level lags and the “iPodding” fears raise its head. And to be honest, this should really concern them.

Apple is in a most unique position in which they own the hardware, software and services and have built all of these around their eco-system platform. That means that when Apple engineers start designing a product, the center of its design is the platform. For most of Apple competitors, it is the reverse; the center of their design is the device itself, and then they look for apps and services that work with their device in hopes that this combination will attract new customers. In the end, this is Apple major advantage over their competitors and they can ride this platform in all kinds of directions.

For example, when they were working on the iPad, they already had in place the iTunes content store and since all were based on the iOS platform, it was pretty straight forward for them to now build the iOS iPad Apps environment that easily sat on top of this already existing software platform. Of course, the iOS app platform already existed for the iPhone so all they had to do is to create an apps toolkit to take advantage of the new screen size they now had with the iPad.

We will see this same concept repeated when they eventually release anything for the TV. The current Apple TV product is a good first step and is also based on this iOS platform and eco system. But let’s say they design an actual TV; the platform is already in place for them to tap into it and indeed, the center of design for any future TV is the platform itself.

For a lot of vendors, they had hoped that Google’s Android would deliver to them a similar platform to build on, but to date that has not been the case. The various versions of Android only complicate things for the vendors and the software community and in essence they really don’t have a solid unified platform to build anything as powerful as Apple’s iOS architecture. As a result there is a lot of fragmentation in the Android marketplace. This is more than problematic and has been at the heart of Android failures in tablets thus far.

And I am not sure Microsoft’s new Windows 8 platform will deliver what they need either. The key reason is that Windows 8 is still based on a PC Centric OS and this is being extended downward to tablets. At the same time, they have a Windows OS for their smartphones that share no code and no app base. In the end, it delivers at best splintered apps and a non-unified ecosystem even if all the devices have the same Metro UI. I believe this OS has more of a chance to challenge Apple then Google’s Android will, especially in tablets. But the lack of a powerful unified platform that the vendors can really design around and support, along with vendors own quests to differentiate, could cause this approach to have a hard time competing with Apple too.

The bottom line is that when it comes to competing with Apple, it really is all about the platform. And at the moment, I don’t see anybody creating a unified and powerful enough platform that comes close to or is equal to what Apple already has in the market. That is why Apple is cornering the market in mobile devices today and why it could continue to grow its user base WW at the expense of their competitors. Based on marketing material on Apple’s own website, I would say they understand this as well.

The New Microsoft and Apple OS Wars–Game On

After years of lagging behind Apple in terms of innovating around their user interfaces on both their smartphones and Windows, Microsoft finally took a big step towards competing with Apple head on last year with the introduction of their new Metro UI. Introduced first on Windows Phone 7, this new Touch UI, which uses a tiling metaphor to deliver a more graphical way of dealing with data, is also coming to Windows 8 this fall and in essence, will finally unify the way people interact with Windows based software across smartphones, tablets, laptops and desktops in the future. And while touch is critical to smartphone navigation, Windows 8 is also built around a touch UI that, especially on tablets, will be key to navigation and input on all Windows based devices soon.

Of course, this move is basically copying what Apple has been doing for over five years with their iOS strategy in which they use the same OS, UI and touch architecture on iPods, iPhone and iPads. And while direct screen touch is not built into OS X, Apple has gone to great pains to create a touchpad experience that very much emulates these same touch movements on all MacBooks and with an external touch pad for iMacs. And with the recent introduction of OS X Mountain Lion, they now add much of the great features only available on iOS devices to the Mac as well.

What’s interesting about these developments is that in some ways, history is repeating itself. In 1984, Apple brought to market the Mac and introduced the world to graphical user interfaces and the mouse. It took Microsoft a couple of years and some real false starts until they finally got their own GUI right on Windows 95 and continued to ride this new OS and GUI into further PC domination. And during this period Apple had major changes in management and inconsistent strategies that played perfectly into Microsoft’s hands and Microsoft grew exponentially without any real competition.

But when Steve Jobs came back to Apple in 1997 and began crafting a strategy in which Apple would begin to drive the market beyond the PC and launch the post PC era, Apple soon emerged as the real powerhouse in the world of technology. Starting with the iPod and then with the iPhone, Apple saw their fortunes change from an also ran to the lead horse that is mining most of the industry profit today and is now the most valuable company on the planet. Now Microsoft and other competitors are playing catch up again.

From Microsoft and their partners point of view, they are really hoping that history literally repeats itself. Just as Windows was used to bypass Apple in the past, they are “praying” that Windows 8, with its ability to deliver a similar OS and touch UI experience across multiple devices can revive their fortunes and make them relevant again.

Related Column: Dear Industry History Will Not Repeat Itself

But this is a very tall order this time around. Apple’s lead with iOS and OS X, along with their stellar offering of products that use these operating systems is very large. And while Microsoft’s OS seems to be a solid offering, unlike Apple who owns the hardware, software and services aspect of their eco-system, Microsoft has to hope that their software developers, hardware partners and potential service providers can gel and execute in a way that allows them to actually gain ground on Apple. And, they can’t afford to have any missteps. While Windows on Intel X86 chips seems solid, their move to put Windows on ARM is only in its early stages and its success on this new processor platforms, which includes the need to have software written specifically for these chips, is not assured.

Also keep in mind that, while Microsoft and partners are scrambling to play catch up, they have no idea what else Apple has up their sleeves in the way of new hardware, software enhancements and services. If Apple continues to innovate and stay at least two years ahead of the competition, Microsoft and friends may always be playing catch up for the foreseeable future. And this time around, Microsoft will also have to compete with Google and the Android crowd and Google’s Chrome OS that is destined for the desktop. And with HTML 5 emerging as the future of software development and Web Apps becoming the means of delivering applications, Microsoft this time around has their hands full keeping up with a market that is moving much faster then it did in the past.

But now that the Windows crowd finally has an OS, UI and a strategy that is actually designed to compete with Apple, Microsoft and their partners can now look towards what they hope is a promising future and like in the past, are telling Apple that the game is back on.

Why Amazon Will Create Brick and Mortar Retail Stores

Over the years, in my various discussions with Steve Jobs about Apple and their products, there was one theme that always came out when we discussed any of his product designs; they had to be easy to use. In fact, he was the consummate customer of Apple products. If he deemed them not “easy-to-use” then it was back to the drawing boards until they were.

But while this was at the heart of his designs, he also knew that easy to use was actually a relative term and that in the end, there are a lot of variables around the technology people use that determined if they were easy for “them” to use or not. So when Apple was creating the Apple stores, they made sure that they did not just create a place where people can come and buy an Apple product. Indeed, an Apple store, with its extremely knowledgeable sales staff and their genius bars are just as critical to the success of Apple’s stores.

What Jobs and team fundamentally understood is that for those who use technology every day in the office, their ability to use a Mac and Apple’s products are intuitive enough for them to learn and use out of the box. But for the millions of people who do not use technology as part of their work or school, even easy to use products can be intimidating and some will need hand holding from time to time. Apple also understood that as people begin to integrate them into their daily lifestyles and use them as the center of their digital universe, the variables of how to make the technology work for them would only increase. With that in mind, Jobs and team knew that they needed to not only create a product but also had to provide the software and services, in an integrated way, if they were going to grow the company and become extremely profitable.

This formula is not new. In fact, if you look at the history of mainframes, mini-computers and even PCs, they all followed a similar evolutionary path. First comes the hardware, then the industry backs a major OS for these systems, which then makes it possible for the software world to create the programs that make the hardware indispensable. But over time, the profit is taken out of the hardware and the real money shifts to software and services. This is especially being played out now with the PC crowd. The profits are gone in hardware and only the software guys (i.e. Microsoft) are making any money in the PC game. That is why HP has spent billions on EDS and their service business because all of the real profits for the hardware guys have shifted here.

Apple is insulated from some of these issues since they control the hardware, software, and services. But while most people think of their services as iTunes and their related apps and cloud services, they miss the fact that their Apple stores are also part of their services offering. A good way to think of this is that the Apple store is their EDS. They are there to interact with the customer, to help them integrate Apple’s various products into their life or work-styles and if there is a problem, solve it for them on the spot. (Sounds a lot like EDS and the big service providers does it not?)

This is why Microsoft has suddenly entered the retail business. While selling their products is part of their retail offering, these stores are their “EDS” that meets the needs of their consumer’s customers. Like Apple, these stores are there to help them “integrate” Microsoft products into digital work and lifestyles and if problems arise in doing this, be the place to come to help them deal with it. While the Microsoft stores need to break even, they are not necessarily profit centers. Instead, think of them as consumer service centers that keep the customers happy and making sure they keep buying products that use Microsoft’s software from all of their partners.

Google opening a store in Ireland is a nod in this same direction. And now we have rumors that Amazon is looking at opening their first store in Seattle. At first, you might think that an Amazon store will be going after a Costco given their breadth of products. But Amazon is smarter than this. They have gone to school on Apple and like Microsoft, understand that a retail storefront is actually a vehicle for servicing their customers who buy their dedicated technology products. At the center will be their Kindle line of course, and the store will be there to answer questions and help people get the most out of their Kindle eBooks and tablets. But it would not surprise me if this signals they might also do an Amazon branded smart phone and over time consider other Amazon branded products that these stores can sell and support.

None of these moves to copy Apple with storefronts should be too surprising given Apple’s success in this area. But while Apple Stores do sell Apple products and are used to drive people into the stores to show off their wares, keep in mind that the role it plays in providing service and support is equally important to its success equation. And for Microsoft, Google and Amazon, and any other vendors who move towards vertically integrated products, if they really want to keep their customers happy and coming back for their branded products, they better be ready to provide the service and support that goes along with helping them integrate these products into their digital lifestyle. If not, that loyalty will shift to Apple, who has defined the consumer version of EDS and is well positioned to continue to take customers away from the competition.

Windows 8 on ARM: The Big Questions

Microsoft released a lengthy blog post yesterday on their website specifically around Windows 8 on ARM. Although the post shed some insight into a number of the looming questions we all have about Windows on ARM, there are still a few things I am concerned about.

Windows 8 on ARM has the potential to be either wildly successful and disruptive but it also has the potential to fail in the short-term.

How Will Microsoft and Retail Position the X86 vs the ARM hardware Versions?
When I put myself in the consumer buying mindset for a new Windows-based PC, I see some potential confusion when it comes to product positioning. Microsoft has a challenge on their hand that I am fascinated to see how they figure it out.

What Microsoft, their hardware partners, and their retail partners can not do is position ARM notebooks or other form factors as limited devices. So they can’t use terms like “full Windows experience” or “the Windows you know and love” types of terminology for non-X86 devices. Taking this direction would cause consumers to ask of their ARM counterparts: “I don’t get the full Windows experience I know and love on these products”? Which would essentially deem Windows on ARM devices to fail because they would be positioned as truncated.

This is actually an area where I am intrigued to see if the Intel inside branding efforts of years past have any relative spill over. It actually could if consumers are on the fence. Consumers may consider going with a product with Intel, or AMD for that matter, the “safe bet” if there is any confusion what-so-ever.

Unfortunately, or fortunately depending on who you are, I don’t think any of the ARM companies benefit by touting their brand name in a Windows 8 on ARM device. For example saying “Runs Nvidia Tegra 3” or “Qualcomm Snapdragon”. In fact that may add to the confusion rather than help clear it up.

It is of course possible that Microsoft and retail partners ignore trying to position Windows on X86 and Windows 8 on ARM differently at all. However, unless the device experiences have no difference at all this would be a mistake.

Will All Drivers Be Supported?
To quote the blog post directly:

“Our device strategy uses standardized protocols and class drivers extensively”

“Of course Windows has many class drivers inside, which you experience when you plug-in a wide variety of USB devices, such as storage, mice, or keyboards.“

“The majority of printers selling today are supported using the class driver, which means you’ll be able to “plug and print” on WOA without additional drivers”

This must be true and must be delivered upon. I want to be optimistic about this and take Microsoft at their word that drivers won’t be an issue, as they appear to insinuate. However, I will feel better once I see Windows 8 on ARM working with a wide variety of peripherals.

Are Consumers Willing to Invest in New Software?
This may be perhaps the biggest point to wrestle with. As I have stated before, I believe Microsoft, with Windows 8 in general, has come as close to fundamentally starting over with Windows as they possibly could without completely starting over. Windows 8 is a step in the right direction to optimize Windows for the future of computing.

Consumers being willing to start fresh with software is the wild card for me. Unfortunately I have no hard data (yet) on this but I will offer some observational logic as to why this may be the case.

Firstly, consumers switching to the Mac platform at incredible rates is an indicator. Apple continually mentions their stats on each quarterly call that 50% of Mac sales are to first time Mac buyers. This would mean that many of those customers have made investments in Windows software and are willing to start over. Perhaps this same buying psychology could translate to Windows 8 on ARM with a reality that legacy Windows software isn’t as important as many would think.

Secondly, reports came out in late December from Flurry that on Christmas day there was a 125% increase in app downloads mostly coming from the 353% increase in device activations on the same day. This leads us to believe that as consumers get a new device they go app shopping.

Lastly, the economics support this trend. The reality is that the new app economy has driven the cost of software down. This is not only true of mobile devices but of desktop / notebook as well. The days of selling software and software bundles in the hundreds of dollars are over. If you look at the top-selling apps in the Mac OSX App store there isn’t a single one over $29.99 and most are well south of that figure. With lower overall app pricing becoming the norm it makes it feasible for consumers to actually start over with software.

Could it be Netbooks all Over Again?
In all of these scenarios I am generally concerned that Windows 8 on ARM devices may be headed down the path of Netbooks in their early days if we are not careful. Netbook return rates were north of 30% in their early years mainly because consumers bought them expecting a “full PC” experience and early Netbooks didn’t deliver. This was primarily because early devices were Linux-based. However, even once the devices ran Windows, they were still positioned as “not full PCs” mainly because they were underpowered. It was a positioning mess in my opinion.

I am not as concerned of these devices being underpowered as much as I am them fully delivering on the full PC experience. This will have to include a robust list of software, which Microsoft and partners are working on. There are a number of form factors outside of the clamshell PC design that I think will be more successful for Windows 8 on ARM vendors and Hybrids being the most interesting potential.

Even with all the questions still looming, ultimately the positioning of these products is what will make or break Windows on ARM devices.

Do Apple Competitors Make Bad Products?

I often engage in discussions with the financial community on matters related to tech for their portfolio management. One of the things I was asked in a recent conversation intrigued me. The question was around why Apple seems to be dominating their competition with such a limited product portfolio mix.

Tim Cook continues to emphasize with each investor, earnings, and public event that Apple’s laser focus is to continue striving to make the best products on the planet. Given that Apple seems nearly unstoppable, it appears their strategy is working. And it does make you wonder what Tim Cook’s statements about Apple continuing to focus on making the best products and Apple’s dominant position (especially with iPhone and iPad) says about other products on the market.

So the question thrown at me was “Do Apple Competitors Make Bad Products?” In light of Apple’s continual progress forward and other companies’ struggle to keep up, this is an interesting question. The answer is simply that many Apple competitors make very good products. I happen to like quite a few of them. The problem—for competitors—is that Apple makes exceptional products and perhaps more importantly, extraordinary experiences with those products.

To dive into this deeper, three fundamental points need to be established…

Apple Has More Competition Than Anyone—Yet No True Competitors

When you think about Apple’s vertically integrated business strategy of having a dedicated hardware business, software business, and services business, you realize that Apple competes toe-to-toe with almost the entire tech industry. Yet no company competes toe-to-toe with Apple.

What I mean by that is Apple competes directly with hardware companies, meaning people who make notebooks, desktops, all-in-ones, smartphones, tablets, and set-top boxes to a degree.

They also compete with those who make software, particularly in operating systems, but also in core apps. They compete with Microsoft at an OS level and at an Office level with Pages, Keynote, Numbers, etc. They compete with companies who make media management and creation software like Adobe, or ArcSoft etc, with iMovie, iPhoto, etc. They compete with Google with Android. The list could go on.

They also compete with services companies. iTunes and iCloud as a service competes with a host of online services providers from email, to calendar, to movies, music, storage and backup etc. Google and Microsoft again are competitors here along with a long list of others.

They compete to a degree with retailers. Apple retail competes with Best Buy, Wal-Mart, Target, Staples, etc. Note that Apple doesn’t compete on all levels with these retailers, but we have to acknowledge there are some crossovers.

When you look at the sum of their businesses, because of their vertically integrated strategy, it is not quite obvious the large list of competitors Apple has all over the industry. Yet the reality is that no other company has such a tightly integrated vertical strategy as Apple. So my first point is that at a fundamental level, Apple doesn’t actually have any true competitors who compete with them on every level they way they do with the rest of the Industry. This, at its core, is what sets them apart.

Granted we could debate that with Google’s acquisition of Motorola, they have all the parts on paper to compete with Apple toe-to-toe, but for the time being I still consider that a stretch.

Apple’s “Works Better Together” Philosophy

What is truly unique about Apple is the relationship that all their products have with each other. It is as if each product was made for the other, yet alone each one is still a solid standalone product. We call this the “Works Better Together” approach. It means that your products or “consumer end-points” can work fine as standalone products, but work even better as a comprehensive whole. In concept this sounds like a no-brainer, but the reality is that Apple’s vertically integrated approach is essential in executing this strategy.

Too many companies who make consumer products organize their business units to compete for PNL. Sometimes even worse than competing for PNL, they work as a silos and never have a clue what the other business groups are working on. This makes it extremely difficult for a company to create a “works better together” portfolio even if they have all the parts to make it work.

By developing this strategy as a part of the “iDevice” ecosystem, Apple benefits by creating a user experience that is not related to simply one device, but to the entire Apple ecosystem. This and more is what we mean when we talk about the Apple ecosystem being sticky and creating consumer loyalty.

Technology as Art

Lastly, Apple has a culture that is completely unique, which is another part of the reason for its success. Steve Jobs in his many keynotes has pointed out that Apple’s approach to products is that they are at the union of liberal arts and technology. And nobody in the industry so far has been able to match Apple’s eye for design.

What this means is that there is an added dimension of design and technology as art that influences the thinking of those who work at Apple. This group is like a passionate team of artists who happen to turn their art into technology.

This is the major reason that Apple emphasizes simplicity. Steve Jobs has in many keynotes and demos said that Apple’s various products “just work.” What we must not forget is that creating technology products that are simple is no trivial task. Simple solutions require sophisticated technologies. Apple knows this better than anyone and it has oriented itself to succeed at just that.

So it is not that Apple competitors make bad products. Their hardware competitors and OS competitors make good products. It is simply because of their vertically integrated model, paired with a works better together product philosophy, coupled with incredible execution, and a hardware as art design strategy, that Apple simply makes exceptional and extraordinary products.

Which is why one can argue that they truly do not have any real competitors.

The Tech.pinions Predictions For 2012

It’s fun to make predictions. Luckily none of us are in the predictions business but it’s fun to analyze, speculate, and simply hope for interesting things to come prior to each new year. This year, rather than have each of our columnists write a number of predictions we decided to have each submit two. So below for your reading pleasure is our bold proclamations for the technology industry in 2012.

Peter Lewis

1) The existence of the Higgs Boson, also known as “the God particle,” finally will be confirmed in 2012 as the Large Hadron Collider (LHC) at CERN in Geneva ramps up to full power. Not to be confused with the Higgs Boston, which confers Mass. to Beantown – I’d love to take credit for that line, but The Onion beat me to it – the Higgs Boson is a theoretical subatomic particle whose existence would take humankind a step or two closer to understanding the very nature of matter, the mysteries of space and time, and the future of the universe, which could come in handy in case you’re trying to decide whether to buy or rent. This very tiny particle will be the biggest science story of the coming year. At the very least, it will justify the estimated $4.4 billion cost of one of the largest and most complex pieces of technology ever built, not counting Windows Vista.

2) This was the year of Big Data and Cloud Computing. Next year will be the year of trying to actually move Big Data through the Cloud at useful speeds. Scientists in 2012 will achieve a breakthrough in sustained data transfer speeds on wide-area networks, paving the way for government and academic transfer rates approaching 100 gigabits per second. Unfortunately, you’ll be very old, or perhaps even up in the clouds yourself, by the time such speeds are available to personal computer and mobile device users. In theory, you’ll be able to download the entire Library of Netflix in 14.4 seconds, but. In practice. Your movie. Will. Download. And download and. (Go get a cup of coffee.) Download. Like. This. On the bright side: I predict that the average broadband speed in the United States in 2012 will finally catch up to the average broadband speed in South Korea in 2002.

Tim Bajarin

1) Netbooks will make a comeback.
In 2011, netbooks fell out of favor with consumers as tablets became the hot mobile product. The education market is still interested, though. If vendors bring out netbooks that look more like Ultrabooks but are priced between $299 and $350, these types of products could strike a nerve with consumers again. Of course, they would have lower end processors, a shortage of memory, Android as the OS, and could even just ship with the Chrome Browser on it.
Although they may only be a small part of the PC shipment mix, I believe there is still real interest in a lightweight, very low-cost laptop. While Ultrabooks will fit the bill for those with more cash on hand, a fresh generation of netbooks could find new life at the very low-end of the laptop market.

2) Ultrabook-tablet combo devices will become a big hit.
Ultrabooks with detachable screens that turn into tablets could be the sleeper hit of 2012. Also known as hybrids, the early models of this concept used an illogical mixed operating systems; Windows when in PC mode and Android when in tablet mode. But by the year’s end, both Windows 8 for tablet and Windows 8 for laptops will be out and these hybrids will be completely compatible. I expect to see solid models of this type of hybrid by quarter four.

Patrick Moorhead

1) Smartphones and Tablets erode PCs even more than expected
Smartphones and tablets will disrupt consumer PC sales even more than anyone predicted. The “modularity effect” will start to engage where smartphones and tablets, when wirelessly connected to large displays and full-sized input devices, can replace a PC for basic usage models. That sefment of consumers will be willing to pay even more for their smartphones and even less

2) Auto check-in subsidized phone or service launched
The first phones with private “auto check-ins” for stores, restaurants, bars, coffee shops, malls, and gas stations will be launched in exchange for an additional $49-$99 subsidy. Competitive deals and loyalty benefits will be presented to the consumer based upon where they are checking in. The auto check-in will only automatically be shared with the company providing the subsidy and not be public, unless the consumer decides so. The phone will be marketed to middle-income, younger consumers who are willing to trade privacy and advertising for cash.

Steve Wildstrom

1) A major professional sports league will do a deal with Microsoft for over-the-top streaming of live games via Xbox. This will be a major step in breaking the iron triangle of content owners, networks, and cable/satellite distributors and will increase Microsoft’s lead over Apple and Google in streaming content.

2) The U.S. government will conclude its antitrust investigation of Google without bringing any charges. The EU, however, may take a harder line, so Google won’t be out of the woods.

Ben Bajarin

1) Google will sell the Motorola hardware division. When I wrote back in August about why Google should buy Motorola, I didn’t intend it to be a prediction. Even though a week later they actually did buy Motorola. For me it was more of a theoretical analysis of what I thought Google should do and what would be best long-term for Motorola. Given that the patents are what Google is claiming is most valuable to them, once the acquisition is complete and the active lawsuits are settled, Google can legally sell the hardware division and still keep the patents for future protection. If Google truly wants to maintain good relations with their customers, it behooves them to get rid of the Motorola hardware business.

Although, I wouldn’t sell this business until 2013 if I was Google. Just in case their current partners like HTC and Samsung for example begin to shift their loyalty to Windows Phone or even perhaps webOS. This would inevitably hurt their market share and could lead them to go the vertical route, which they would need to Motorola hardware division to do.

2) Google will launch a Chrome based tablet, probably called the Chromepad. It will be priced at $99 and only be used for browsing the web and web services through Google’s Chrome OS. It will be highly disruptive and usher in the era of low-priced, web and web app only connected tablets.

BONUS Far Out Prediction

I’d like to throw in a bonus wild prediction. I think it would be great and completely re-shape the broadcast and over-the-top TV landscape. Microsoft will buy DirecTV and integrate it with the XBOX 360 and all future US-based XBOX’s going forward.

From all of us at Tech.pinions, Happy Holiday and have a great New Year’s.

Why The Android Update Alliance Was Doomed From the Start

When Google announced the Android Update Alliance, an initiative to bring each new Android OS release to all devices in a timely manner, it was well-intentioned but doomed from the start.

Jamie Lendino over at PC Magazine had a great column called “Google’s Android Update Alliance is Already Dead.” I recommend a read of this column in order to get some more context from the handset OEMs and carrier quotes on the subject. The reality is that this alliance was flawed at a fundamental level from the beginning and was destined to failure.

There is an important element to understand about this industry and it comes down to two types of strategies to bring devices to market. The first strategy is a direct to consumer product development approach. This is the strategy most closely followed by Apple, due to the fact that they have their own retail stores and control their own retail presence. Both of those strategic points in Apple’s favor are strengths at a competitive level. In this strategy the end consumer is your customer, they are the ones you are attempting to sell directly to. When a more direct to consumer strategy is employed, a more limited product mix is possible.

The second strategy is a channel strategy. This is the strategy that many take by order of necessity. In this strategy, although devices are made for consumers, the customer is actually the channel, or the retailer and carrier. Device manufacturers actually create products specifically for the channel in the hopes that the channel can sell them to consumers. Device manufacturers are not guaranteed that the channel will sell their device or give them favorable margins on devices sold. Because of this fact, device OEMs must create a device menu in order to give many different channels the opportunity to sell different devices. The other key point in a channel strategy, is that the channel (whether it be a retailer or a carrier) is not interested in selling two products that are too similar to each other or target the same market segment. This is why we see such a heavy device mix in carrier retail for example. I empathize with companies who have to employ a channel strategy because it is very hard and very frustrating–and also very political. However, employing a channel strategy engrains in a device OEM what I call a “ship-and-forget” mentality. This is at a fundamental level why the Android Update Alliance was destined to fail.

This mindset is unfortunate but necessary to employ a successful channel strategy. Companies that make a menu of devices to sell to the channel need to move quickly to the next batch of devices and commit existing development resources to this new batch of devices. This makes supporting legacy devices more difficult due to most of the engineering always having to move to new product development. There are fewer resources, and less priorities frankly, for legacy devices because almost all the focus is on the future not the past. This again is fed by the business model of those who are selling to the channel which yields low margins but requires high volume.

It is also partially Google’s fault because they put updating and supporting devices in the hands of the OEMs. Often this is because the OEMs have changed Android slightly in order to differentiate their handsets, therefore said OEM is responsible for the engineering to get their legacy devices up to speed. It is hard to side with one or the other on this issue. Of course if no one changed Android and left it stock, it would be easier to update quickly. The only problem with that is that there is VERY little differentiation in that world and any differentiation is limited to hardware. This is the sea of sameness I talk frequently about and in the past it led to spec battles and very little innovation.

If you want to see the sea of sameness in action, go to a big box retailer who sells PCs and look at the wall of Windows machines, all running identical software thus the only difference is in hardware. Hardware differentiation alone would be a boring future.

The channel strategy that is employed by many in the industry is a simple truth about how this industry works. It has its plusses but it also has its minuses. Vendors must differentiate, but they also have to cater to the channel. The channel, and horizontal operating system solutions create this sea of sameness due to the nature of the business model.

Everyone from the OEM, to the channel (retailer and carrier), as well as the software platform (Google) have to align for the good of the ecosystem if this is to get any better. The only problem is from what I see so far they are still more dis-aligned than aligned.

So although it was well-intentioned, the channel strategy and lack of Google’s own committing of more resources to assist OEMs is what keeps the Android OS unity a pipe dream.

Who Really Needs a PC Anyway?

James Kendrick at ZDNet wrote a post asking an interesting question: Who really needs a stinking tablet anyway? His post is well articulated but misses the bigger picture of what tablets are and more importantly what they represent. So rather than look at the world today where tablets are in their early maturity stage, I would rather look to the future, at which point my title, –Who Needs a PC Anyway?– will be a valid question.

In my TIME column today I shared some perspective on what I am calling the Great Tablet Debate. Similarly I wrote a TIME column in June on Why Tablets Represent the Future of Computing. Going back even further when the iPad was first announced and demonstrated I wrote a column (I am quite proud of) for my friends at SlashGear called From Click to Touch – iPad & The Era of Touch Computing. I reference those three articles because they represent a much more holistic view of my thinking than I can get into with one single column – although I will try.

Along those lines I also strongly encourage a read of MG Sieglers post on how Tablets are Computers too.

The key to this whole discussion is to understand the mainstream part of the consumer market and their relationship with technology. If we use the diffusion of innovators theory then we have a start at understanding how technologies move throughout the consumer adoption cycle. What that theory doesn’t deal with, however, is how each group has different demands and expectations with technology.

The innovators and early adopters bring a very different mindset to their tech products than do the early majority, late majority, and laggards to a degree. I think studying the innovators and early adopters (a group I am in) is interesting but the early and late majority are the most important because they represent the largest part of the market.

In Crossing the Chasm, Geoffrey A. Moore dives deeper into this topic by pointing out how most technology products fail to cross the “chasm” – to move from early adopters to mass audience. He also points out, in this classic book, how each market of the diffusion of innovators has very different needs.

So the key is to understand the different needs of each of these markets and especially the early and late majority. We have done research with this category and found that more than 90% of the time consumers primarily use less than 5 applications with the top two use cases being checking email and browsing the web. None of those top 5 applications used 90% of the time are CPU intensive. In fact most PCs today have significantly more processing power than a consumer regularly uses. I’d actually argue that todays PCs are overkill for the majority of tasks consumers do regularly. They simply use them because prior to tablets they had no mobile computing option.

When it comes to my firms consumer research on the topic of using a tablet or using a PC we are finding that more consumers observe they can do everything they regularly do on a PC with an iPad. The reverse is true with the innovators and the early adopters whose technology demands and expectations are very different. Most in that category still want or use a PC due to those demands. James’s observations in his column more closely represent our research with the early adopter category but not that of the mass market.

The trend we are seeing, that is quite frankly fascinating and potentially dangerous, is that we are hearing consumers buying iPad’s instead of upgrading an older desktop or notebook PC. Their logic is that the iPad will give them more portability and ease of use in the majority of tasks they do regularly, leaving their old notebook or desktop to fall back on for the small use cases where they need it.

This is fascinating because it means that for the time being iPad’s are extending the life of desktop and notebook computers. Consumers are realizing their desktop and/or notebook is good enough and are using the iPad for the new experiences in portability and lean back and lean forward modes. It is also dangerous because my intuition is that as consumers realize how the iPad (or tablets) suffice for most of their major use cases they may realize they never need a clamshell PC again. Also, after a case can you guess what the second most purchased accessory with an iPad is? If you guessed a keyboard you are correct.

Our analyst colleagues at Canalys have for the first time lumped tablets into their overall PC industry tracking. A move I applaud, because in my opinion tablets should be counted as PCs because that is what they are and more importantly that is what they represent to consumers. The tablet should simply be viewed as a form factor evolution of the PC. I expect even more form factor evolution of both the tablet and the PC in the years to come. Tim dives deeper into this in his Monday column on Tech Trends and Disruptors for 2012.

Furthermore, I strongly believe that the limitation in productivity observed by some with the iPad, is not a function of the hardware but the software. As more apps get developed to increase productivity on every front and for every vertical, I believe the industry will have its “a ha!” moment. Shockingly–or not–more and more consumers we speak to have already had this moment, I am just waiting for the tech industry to catch up.

Tech Trends and Disruptors to watch in 2012

You may not know it yet, but when we end 2012, we will look back on it and realize that it was the most disruptive year we will have had in personal computing in over a decade. In the next 12 months, the market for personal computers of all shapes and sizes will have changed dramatically and I believe we will see at least one of the top 10 PC vendors leave the PC consumer business completely.

So what will be the major disruptive forces that could re-shape the PC business starting in 2012? There are four technologies and trends in the works that I believe will force the computer industry in a new direction.

The first will be Intel and their partners huge push to make ultrabooks 40% of their laptop mix by the end of 2012. Although I don’t believe they will achieve that goal, especially if ultrabooks are priced above $899, the fact is that ultrabooks are the future of notebooks. Instead of thin and light laptops driving the market for laptops as they are now, ultrabooks, which are thinner and lighter with SSDs and longer battery life, will eventually be what all laptops will look like within 5 years. The heavier and more powerful laptops that exist now won’t go away completely as there are power users who will still need that kind of processing power. But ultrabooks will be the laptops of the future and 2012 will be the first year of its major push to change the portable computing landscape.

There is an interesting twist with ultraportables that could be even more important starting next year. This will be the introduction of ultraportables with detachable screens that turn into tablets. In the past, this hybrid as it is called, ran Windows when in laptop mode and Android when in tablet mode. But this approach was dead in the water from the start. But with Windows 8 tablets ready to hit the market next fall, you will see ultraportables with detachable screens that will run Windows 8 with the Metro UI on the laptop and Windows 8 tablet version with the Metro UI in tablet mode. This would bring a level of OS consistency across both device modes and I think that this concept is a sleeper. In fact, if done right, this alone could reshape the traditional PC market in the near term.

The second major disruptor will be the acceptance of tablets in enterprise in greater numbers in 2012. Although IT directors will still be buying laptops, there is a real push by some to add tablets to their overall business use cases. At the moment, Apple has a huge lead here with 475 of the Fortune 500 either buying iPads for deployment or pilot programs and some, like American Airlines, United Airlines and SAP have each bought 10,000+ iPads for use in their IT programs already. As for Android in IT, that boat has sailed. Google screwed up their version releases of Android and not one IT director I have talked to is willing to trust Google with their Android roadmap always being a moving target. And don’t get me started on Android’s security risks. Recent reports that 37% of all Android Apps have some sort of bogus code or malaware has pushed Android out of most IT discussions.

Instead, the option to the iPad that is really on their radar is Windows 8 for tablets, especially the version done for Intel processors. What they want is the ability to run Windows apps as is on a tablet even though they may actually write their own custom programs for Windows 8 and its Metro UI as well. But this is sort of comfort blanket to them and this Windows 8 tablet has many, especially hard-core Windows shops, waiting to see how good Windows 8 will be when it debuts in Oct of 2012 before making a final decision on what device/platform they will integrate into their IT programs over the next 5 years.

The third disruptor will be the proliferation of tablets at the “low” end of the pricing spectrum, which will give birth to the “good enough” category of tablets. There is no question that the iPad will pretty much represent the higher end or “most” desired tablet, but for many, $499 is still too steep a price for them to buy into a product category that they want to participate in. Even with this competition, Creative Strategies has still forecasted that Apple will sell north of 70 million iPads in 2012. But the Kindle at $199 and the Nook Tablet at $249 has opened up the tablet market to millions of new users who will jump on the tablet bandwagon in 2012. This will be the most explosive year for tablets yet and by the end of 2012 we estimate that well over 120 million people WW will be using a tablet of some kind for personal and business use.

The fourth disruptor that will impact the 2012 computing and mobile market is related to processors. By the end of 2012, Intel should have its latest version of Atom that will have it greatest level of processing power and low voltage efficiencies built-in. That means that for the first time, Intel can aggressively compete with the ARM processors for smartphones and in some tablets where low voltages is important. Although Intel is very late to the mobile processing party, you can’t count Intel out, as they are known as a very powerful competitor. And, being this late, they could be very aggressive in pricing to buy into this market in a big way.

The other thing related to processors is the fact that Windows 8 for ARM should debut in 2012. That means that, at least in principle, the ARM guys can start going after the ultraportable market as well. On paper this is good news for the consumer as it could help rapidly bring prices for ultrabooks down. However, Windows programs cannot run on ARM processors as is and apps will need a lot of re-written code as well as UI enhancements to work on this new device platform. But the ARM camp is pretty excited about being able to move their chips upstream and supporting Windows 8 and this dynamic alone will shake up the market in 2012.

As for a top 10 PC vendor pulling out of the consumer PC business, I think that this is inevitable. All of the PC vendors are working on 5% or lower margins for their PC’s sold and given their costs of advertising, overhead and channel support, it is really hard for any of them that do not have a major enterprise business to help bolster profits through software and services, to compete. That is why I believe that at least one of the top 10 PC vendors pull out of the consumer market by the end of 2012.

Yes, 2012 will be a most interesting year in computing. And with these disruptions in the works, it is poised to perhaps become most explosive year we have seen in some time when it comes to altering the direction of the PC market.

Apple Is Becoming the New IBM

“No one ever got fired for buying an IBM.”

That phrase was popular when IBM, in conjunction with Microsoft, was becoming the standard business workstation in the mid-to-late 80’s. Deciding to purchase products from the industry leader was the safe bet, the one with the least risk. This was the underlying psychology of corporate IT buyers and it served them well for many years.

In our conversations with consumers, we find a similar sentiment toward Apple products. Consumers who are purchasing smartphones or tablets for the first time are tending to go with Apple because they are the safe bet in their minds. Other companies may have competitive products with price or feature advantages, but often come with greater risks.

Many consumers we interview have heard mixed feedback or negative stories from Android customers about devices acting up after 6-8 months, containing buggy apps or malware, and getting terrible customer support from their carrier or manufacturer. The reverse is true for first time smartphone and tablet consumers who note the overwhelming amount of positive feedback they hear from people who own iPhones and/or iPads.

It is essential to understand that consumers are very savvy, they do actually shop around, and do research both online and with friends and family. When they constantly hear positive stories and how much those they know love their iPhones, it becomes pretty hard to not go with the safe bet. The decision is even easier now that the iPhone is on all the major US carriers besides T-mobile and rapidly becoming available on all major carriers world-wide.

It is also important to know that when we do consumer interviews and analyze consumer buying habits we are not interested in “early adopters.” Early adopters are predictable and don’t always represent the mass consumer market. We focus more on those who are not in the tech elite, but are practical and desire technology without the hassle of having to manage technology.

This is fundamentally why I believe the analogy of IBM being the safe bet for business rings true with consumers and Apple for the time being. As I stated in my Dear Industry piece last week, this market will evolve and mature quite quickly. I do not expect any one single platform or piece of hardware to control the majority of market share. However, for the time being, a very large portion of consumers are choosing Apple products. The iPhone is the single best-selling phone on the market by far. The iPad is forecast to continue to control over 70% of tablet market share in 2012 and still hold healthy market share in 2013.

Both the smartphone category and the tablet category are in a growth phase. The global smartphone category is projected to grow at 49.2% over the next 5 years and tablets are projected to grow at 200% in 2012. When you look at the numbers and the expansive and rapidly growing TAM for these products going forward you do not need to be the market leader by any means to still sell a significant amount of devices. This is why we need a more informed conversation on market share and include profit share as a part of that discussion.

For many consumers, I am willing to bet, their first smartphone and their first tablet will be an iPhone and a iPad … and for the same reason that an IBM was the business user’s first computer: it’s the safer bet.

Lastly to further make my point, have you ever seen an Apple retail store anywhere close to empty?

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Why The iPad Could Be Huge in China

I’ve stumbled across some interesting research from Citi Group Financial’s internal research group. The research report was specifically about tablets but the part I found interesting was their research related to tablets and China.

Citi surveyed almost 2000 people and found some interesting results globally for tablets. With the US they found that tablets and specifically the iPad were not an immediate threat to replace PCs. Their research pointed out that in the US only 8% had purchased a tablet with the intent of replacing a laptop. The bulk of the usage of tablets the research turned up was for more lightweight consumption. Things like web browsing, email, social networking and multimedia were the top usage models. Their China research however turned up very different results.

It appears that in China there are significantly more people looking at buying tablets and using them as a laptop replacement. 21% of the people in their China survey said they currently own a tablet compared with 17% in the US/UK. 26% of China respondents said they intend to purchase a tablet over the next 12 months compared to 12% in the US/UK.

More interestingly with this data was that 31% of Chinese respondents said that their interest in purchasing a tablet was to replace their notebook. Another 26% expressed interest in a tablet to replace their desktop and another 30% interested in replacing their Netbook with a tablet.

The reason the iPad could be huge in China is firstly because China is a huge market and second because they appear to be interested in a tablet as a PC replacement. Which is a fundamental difference than why US and UK consumers are buying tablets.

If it was clear before it should be crystal clear now why Apple is so laser focused on China. In fact all the trends in China are playing to Apple’s favor. The iPad for example has 73% of the tablet market share in China and we can expect that to grow over the next few months and even more with version 3.

The other interesting thing about China is that it is one of the fastest growing regions for PC sales. This data seems to suggest that China could also become one of the fastest growing regions for tablets as well.

When I first read this data, I thought it seemed a bit too optimistic about China and tablets. Mostly because we are constantly reminded by all the large PC vendors how fast China is growing as a market for PCs. So this data seemed at odds with the reality that PC sales are accelerating in China.

PCs are still maturing in China so why would there already be significant interest in tablets over PCs? The answer I feel lies with China’s need and desire as a market for small and mobile technologies.

Netbooks had quite a run in China and for many Chinese consumers Netbooks were the best priced and sized computers for their first PC purchase. The iPad in terms of size and mobility are highly desirable among the Chinese consumers and may be some of the central reasons they are attracted to tablets so heavily.

Because China is so large and because PCs are selling like hotcakes over there I don’t suspect that tablets will eat into PC sales in any way that should alarm manufactures. Both will continue to grow and accelerate extremely quickly.

It is important to note that the China based research was done with those who are in the upper and rising middle class, which is a large and quickly growing segment of China consumers.

Whether it is with iPads or Macs Apple has a huge opportunity in China.

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Is there a market for Good Enough “Tablets?”

In April I wrote in my PC Mag column about Amazon Stealing Android from Google and argued in this piece that Amazon was most likely building their own proprietary approach to integrating their overall Android Store and a set of music, video and cloud services and integrate it into their future tablet offering.

Then, in August I wrote how Amazon Could disrupt the tablet market by creating a tablet that could sell for $249 even though it would cost $300 to build, but make it up by amortizing users purchases of books, music and videos over an 18-24 month period.

I suggested that if Amazon did this they could disrupt the entire market for tablets by introducing a new pricing model tied to their services that would make it very difficult for any hardware only tablet vendor to compete in this burgeoning market.

Now, in a most interesting post from MG Seigler at Techcrunch we get an actual hands on description of this tablet and it reinforces the price I suggested Amazon would sell it for. And he goes on to give actual details about it coming out in November including the fact that it has a color 7” screen but no cameras and no i/o ports.

If what Mr. Siegler says is true, then this Amazon tablet is more like a Nook on steroids then a serious competitor to Apple’s iPad. It will have very limited features as a multi-purpose tablet, but will excel in offering Amazon driven music, video and clouds services. And of course, we expect that it will have a browser so it would give people using it broad access to Web based content although apparently it will not support Adobe’s Flash.

But this brings up a very interesting question. Is there room in the market for what we would call a “good enough” tablet? Clearly, Apple’s iPad seems like it will be the Cadillac of tablets and to stay with the GM metaphor, the Amazon tablet is probably more like the Chevy Malibu of tablets. Both are very functional but what is inside and what they can do on the road are very different.

While there is always a market for full-featured products like the iPad, there is also perhaps an even larger market for “good enough” tablets like the first gen Amazon tablet might me. And Amazon, with this limited design and low price point, seems to be aiming at the “Chevy” market for tablets where bells and whistles are less important then price and basic functionality.

This concept of good enough computing has been bandied about in the industry for decades. It started with desktops where high end gaming PC’s ruled the gaming and engineering/graphics market, while lower cost PC’s with less horsepower and functionality took the lions share of the bigger “good enough” PC market. And the same thing happened with laptops. Gaming laptops powered the upper end of the portable market, while thin and lights went after the business crowd and value laptops with less power compared to the other two models took the lions share of the broader portable market. And they were good enough for a very large audience of consumers.

Could this “good enough” approach to the market be repeating itself again with tablets? There is no question that even though Apple’s iPad may be the Cadillac of tablets today, Apple was quite aggressive with their pricing so that it has appealed to much more than a more well-healed audience that normally buys upper end models of everything. On the other hand, there will always be a large audience who either won’t spend much on products or can’t for economic reasons and will opt for something in this value line of products or in this place, a just “good enough” tablet if it is available.

My sense is that as with desktop’s and laptops there is room for both and I suspect we will see tablets at a lot of different price points taking aim at the needs of all level of customers wants and needs. And if history is our guide, the products in the “good enough” category could be very large indeed.

Why Microsoft Should Buy HTC Not Nokia

I don’t want to be in the predictions business. I like being in the industry analysis business. However to be an effective analyst and in particular focus on industry trends like my firm does we need to not only analyze the current markets but what the future markets may look like as well. Sometimes we are lucky enough to have some of our forward thinking analysis come true.

When I wrote the column on why Google Should buy Motorola two weeks ago, it was part of my own internal excersise to anticipate possible scenarios based on which companies are more valuable competitively together rather than alone. We do this often because we do a great deal of competitive analysis.

As I stated in my Techland column last weekend, the industry has changed. With the announcment of the Google / Moto deal and the HP PC division spinoff, companies will be forced to opperate very differently if they want to compete and stay relevant.

It is inevitable at this point that we see more large company acquistions or mergers and/or more companies exit certain business’ to focus on more profitable ones.

As I stated above, some companies are more valuable and competitive together rather than alone.

Many believe that Microsoft should buy Nokia, including our president and my father Tim Bajarin. It is hard to argue with his logic or his historic background in the technology industry. In his article on the subject, he pointed out that a vertically integrated Microsoft and Nokia would have a better chance of competing with Apple and Google/Motorola in the future.

I can certainly see Microsoft buying Nokia, but if I was Microsoft I would buy HTC.

HTC Needs More Than Hardware

I’ve stated almost everywhere I write and give keynotes that making money on hardware alone in consumer markets is extremely difficult. If you don’t have proprietary value to add to your hardware to differentiate yourself in the market and drive extra revenue, then you have a rough road ahead.

HTC has always taken this approach and understands this. The problem is their software partners Microsoft and Google don’t want them customizing their software and makes it increasingly difficult for HTC to do so. I don’t see this changing anytime soon.

This is why many in the media have rightly made the point that HTC could benefit greatly from webOS. I completely agree, however it is yet to be seen whether webOS gets spun off with the hardware business. If it doesn’t then one strategy would be for HTC to license it, but again the question of differentiation will come up.

Microsft Needs More Than Software
I believe the trend to verticalization in this industry is real and signficant. The fact of the matter is optimizing software for hardware is a challenging task when an OS is licensed. Steve Wildstrom points out in this article the challenge with open(licensable) operating systems. Apple accomplishes this better than anyone because of their control of the hardware, software and services related to the Apple ecosystem. Apple’s model is closed but it is also a complete holistic ecosystem. And it is obviously working.

Microsoft has two of those three elements and if they want to control their own destiny they need to either enforce much more strict requirements of hardware or they need to own a hardware business for smart phones, tablets and possibly more.

I don’t think enforcing more hardware restrictions is the right path because it doesn’t allow for differention. Microsoft with Windows Phone and Google with Android are not positioned to help their partners differentiate. This is a strategy that will suffocate hardware only players.

The bottom line is that in the future consumers will gravitate more toward ecosystems rather than products. That ecosystem will consist of hardware, software and services.

Companies who orient themselves to build products will have very little consumer loyalty in future product decisions. Companies who build ecosystems will find more loyal customers year after year. In this column I point out why some ecosystems are more sticky than others.

HTC and Microsoft could together become a very powerful global player in mobility. HTC makes great hardware and has some excellent software expertise as well. Both benefit Microsoft greatly.

Competing with Apple is for many companies the worst thing to try and do. However if Microsoft bought HTC I would argue that together they have the best shot.

My Advice to HP: Give All the TouchPad’s Away

Shock and Bewilderment swept the industry as well as the tech journalism and blogger community yesterday. HP announced that they are not just looking to spin off their PC business but that they are also discontinuing all webOS hardware which included the HP TouchPad.

It was fascinating to watch the twitter stream of people commenting when the news hit about the HP spinnoff. Shortly after the initial shock of the news the big question got raised: What does this mean for webOS?

During the aftenoon we came to find out that although HP is discontinuing all webOS hardware operations, they are still commited to the software. If this is true, then I contend that they should give away all the TouchPads left at retail for free. They should at least HEAVILY discount them. Maybe let Best Buy do a special promotion where if you spend more than $200 dollars you get a TouchPad for free. Perhaps run a promo where if you buy HP products like specific printers, notebooks or desktop you get a TouchPad for free.

The reason is because if HP is commited to still supporting webOS it will only live on now by way of license. However no one will want to license it if there is no software ecosystem or apps surrounding webOS. There will be no software ecosystem or apps developed if there are no devices on the market for developers to write apps for.

This is why HP should just give them all away – all 400,000 sitting in a store house. They are already writing off this hardware so why not get it into the market any way possible.

Consumers are simply not going to buy them now because with this news will also come a lack of consumer trust in HP and the TouchPad. However people will accept one that is free just to try it and if they don’t like it they can give it to a friend or loved one. This move would also create a positive image for HP in light of the hit they are most likely taking.

The bottom line is doing this would create a market for webOS software developers to create apps for. My sense tells me consumers would actually be quite impressed with the TouchPad once they got it in their home and maybe would even spread the word about how great webOS is to their friends.

The bottom line is HP needs to move that hardware. Consumers won’t buy them or invest in webOS because it is risky and unknown. Give them all away. There is no downside to the consumer and I would argue only upside for all parties involved.

So to HP’s management-Give them away and make it easier for whoever buys it or licneses it to have a built in installed base of users to build on. I know this sounds bold and risky but that is exactly what you need right now.

webOS: Forget About Licensing, the Game’s Over

Hewlett-Packard’s announcement today that it was discounting all webOS products, including the TouchPad tablet and Pre phones, set off a flurry of speculation that the elegant ex-Palm mobile operating system might find a third life through licensing to hardware manufacturers.

But the fact is that webOS is now stone, cold dead with no hope of revival. The issue has nothing to do with the quality of the software and everything to do with the state of the smartphone and tablet markets.

Just a couple of weeks ago, my colleague Ben Bajarin suggested that webOS could still mount a real challenge to Android if HP licensed it. But that assumed that HP would be standing behind the OS and continuing to court developers.

The biggest problem webOS faced from its Palm days through its 16 months of HP ownership was lack of support from third-party development. Even if someone, and I can’t quite imagine who, were announce tomorrow that they were taking over webOS, it would take months to close the deal and get products back into production. The few remaining webOS developers aren’t going to wait. And the chances of restarting a development effort in the face of the Apple and Google juggernauts are nil.

I don’t know what went wrong with HP’s webOS effort. (Disclosure: I did a bit of consulting on mobile strategy with the company around the time of the Palm acquisition.) But I suspect the failure has a lot to do with HP’s never-ending boardroom dramas.

HP bought Palm in April, 2010. In early August, Mark Hurd was forced out as CEO of the company because of an “inappropriate relationship” with a contractor. In September, HP hired formed SAP CEO Leo Apotheker to run the company. And in February, HP announced the TouchPad and its plans for webOS products at a splashy event in San Francisco.

At the time, HP Personal Systems Group executives, including Executive Vice president Todd Bradley, made it clear that the real goal of the Palm acquisition was to give HP control over its own destiny. Owning on operating system that would provide HP with Apple-like control over both hardware and software. They even announced a version of webOS for PCs, though they never provided more than the vaguest of details. But they said, they knew it would be a long fight, years not months, and they were ready for it.

At first Apotheker, whose background is all in enterprise software, seemed to be fully behind the plan, but I suspect his heart was never really in it–or any other parts of the Personal Systems Group that HP is now looking to sell or spin out. By the time the TouchPad actually launched the TouchPad in July, the company seemed to have lost most of its enthusiasm for the product. It had failed to do the one thing that might have given it a shot at success, line up a rich array of apps, perhaps because the company wouldn’t provide the funding needed to buy developer support. Given the lack of conviction, the fact that it lasted less than two months on the market is shocking but not surprising.

I don’t know that HP could really have challenged Apple–someone recently called the company “the place good products go to die.” But it was an exciting idea and for HP, webOS products offered it a chance to break out of the no-margin commodity PC game. But sadly, HP’s senior management never gave the idea a chance.

Why the Open OS Model Failed in Smartphones

Fifteen years ago, when Microsoft ruled the world and Apple was near death, the tech world was convinced that the conceptual batter between Windows and Mac–open operating systems available to all comers vs. closed systems–had been decided firmly in favor of open. But what applied to PCs in the 1990s does not appear to work at all for smartphones in the 2010s, as Google’s planned purchase of Motorola Mobility marks the beginning of the end for the open OS approach.

A major reason for this is that phones–and tablets–are very different from PCs even though they perform many of the same functions. A phone is a much more tightly integrated device in which it is very difficult to tell where the hardware ends and the software begins. Getting the user experience just right is both harder and more critical, because quirks that are a minor annoyance on a PC–or which can be remedied through an accessory such as a better mouse or keyboard–become killer flaws.

It’s easy to forget today that the first real winner in the smartphone market was Research In Motion’s BlackBerry, a closed system. RIM’s accomplishment was to provide a tightly controlled, secure mobile email device (the earliest models offered neither voice not internet service) that provided seamless access to corporate mail servers.

RIM could make this work because it controlled the hardware, the software, and the BlackBerry Enterprise Server middleware. Its rivals in those early days were the Palm Treo and Microsoft Windows Mobile. Palm was a bizarre beast that never really worked. Its owner, 3Com, first licensed the Palm OS to other manufacturers, then spun its software unit off into a separate company, PalmSource. The Treo was developed by one of those licensees, Handspring, which had been started by Palm’s founders. Palm eventually bought Handspring and reacquired some rights to the Palm OS, but it never had full control of the software. That’s a major reason why Palm and PalmOS gradually became non-competitive.

Microsoft’s mistakes were different, but illustrative of the traps inherent in an open phone operating system. In the best Windows tradition, Microsoft gave its handset manufacturers a lot of design freedom. It ended up with phones with a variety of screen sizes and configurations, with and without touchscreens, with and without physical keyboards. The hodgepodge of hardware made it impossible for Microsoft to provide a consistent–or particularly good–user experience on all Windows Mobile devices. And third-party software developers had a very hard time writing applctions that worked well, or sometimes at all, on all devices. In a final irony, until almost the very end, BlackBerry did a much better job of providing mobile access to Microsoft Exchange servers than Windows Mobile did.

Apple, of course, changed the game completely with the 2007 introduction of the iPhone, and again in 2010 with the iPad. Apple controls every aspect of the ecosystem, Apple software running on Apple hardware that can load only Apple-approved applications. This has horrified fans of open systems. such a Cory Doctorow and Jonathan Zittrain, but the mass market’s love for these devices has allowed Apple to suck up the lion’s share of profits in the handset industry and to define the tablet market to the point where it has no effective competition.

Except for Android, the open model has now all but collapsed. Nokia never achieved widespread adoption of Symbian by other manufacturers. Linux-based LiMo went nowhere, as did Nokia’s Maemo, Intel’s Moblin, and their love child, MeeMo.

The status of Windows Phone is uncertain. After the Windows Mobile nightmare, Microsoft set very tight design standards for its attempt to rejuvenate the platform. OEMs have a limited choice of display size and a physical keyboard is optional, but other specs must comply with the reference design. And Microsoft’s tight alliance with Nokia could result in, effectively, a line of “official” Nokia-built Windows Phone products. It’s nominally still a market where Microsoft offers its OS to any willing license, buy Redmond really controls the game.

Android’s openness has been a blessing and a curse. The free-to-all-comers OS has allowed the platform to gain a great deal of market share very quickly. It has also proved extremely frustrating to consumers, with a proliferation of designs and software versions all with different capabilities and no consistency in their ability to run third-party apps. With an iPhone, you know you will always be able to run the most recent version of the iOS software and any product in the App Store (with minor exceptions for some older models that lack some hardware features of more recent ones.) With Android, you just never know.

I suspect this will change in significant ways as a result of the Motorola Mobility acquisition. Google is never going to become Apple, but I suspect that the Android market is going to look a lot more like Windows Phone does today, with Motorola playing an even more central role than Nokia will for Microsoft. This sort of hybrid of open software with an official hardware maker is novel and largely untested; Palm and Nokia both nibbled at it, but neither was a fair test.

However it turns out, however, it looks like any attempt to build smartphones on the PC model is over.

Why A Tablet is Key To Amazon’s Business

I was being interviewed by a journalist recently where the discussion was around the impending release of an Amazon Tablet. I enjoy helping journalists out with stories and I gladly accept interview requests because the discussion is always engaging and often helps sharpen my own thoughts on a subject.

This was the case again when I was asked why a tablet is important to Amazon’ business and business strategy. That is the question i’d like to address in this analysis.

A Tablet is Amazon’s Brick and Mortar
Here is an analogy: a tablet is to Amazon what a physical store is to Wal-Mart.

If you think about Amazon’s business, it started with selling books online and then quickly became a place where consumers can buy just about anything and shop competitively from one single location. It just so happens however that this location is not physical it resides fully within your browser. Amazon’s location is virtual.

To contrast, a company like Wal-Mart is evolving into the digital age with a strategy that includes their brick and mortar stores. To some degree Barnes and Noble is doing something similar but only in the realm of books. Amazon however has no intentions to create a physical location where you walk in to experience their service. I would argue however that Amazon is very interested in giving you a physical storefront and it started with the Kindle.

The Retail Experience Matters
I wrote an article on Why Apple Retail is Key to Their Competitive Advantage. In that article I highlight some key things about retail.

Any retailer will tell you how important the overall retail experience is to their success. Some companies do retail poorly and others do retail extremely well.

The Kindle for Amazon started completely around discovering, purchasing and reading books. The Kindle is the retail storefront to Amazon’s digital book library.

I believe that the evolution of the Kindle will follow Amazon’s business evolution. It started with books then included everything else. Which is why this next device that will most likely be a fully featured tablet will also come with Amazon’s complete shopping experience built in. This includes not just digital storefronts like books, music and movies but physical items as well. Since Amazon is one of, if not the largest digital storefront, it benefits them to get devices on the market where they control the shopping experience.

This is one of the reason’s I believe Amazon re-jiggered their iOS app strategy to stay away from Apple’s transaction model and fees. I don’t believe this move was just about avoiding fees but that Amazon wanted to control the user experience with their storefront instead of Apple. This is why previously with the Kindle app on iOS the Kindle store launched a web browser and took you out of Apple’s ecosystem and into Amazon’s.

Reflecting on that point briefly it becomes clear that Apple’s app store commerce model works for those for whom billing and storefronts are a problem but it does not work for those companies who have spent millions of dollars perfecting their own e-commerce experience.

Amazon also has an interesting strategy with their Prime service that could be strategically integrated as well with their tablet. Perhaps Amazon gives better deals or promotions to those who own the tablet thus incentivizing more purchasing from their store directly on the tablet.

This is why I believe a tablet is strategic for Amazon. Of course they can and will make sure their services are available on every device imagineable. However if they bring a device to market that is a full blown tablet but also includes the most elegant and seamless experience to research, discover and purchase from; then that device becomes the retail storefront to everything Amazon sells – and more.

Further Reading on Amazon:
How Amazon Could Own the Android Tablet Market

Updated: Motogoo: The Damage to Google’s Bottom Line

Update 8/16: The market seemed distinctly cooler to the Google-Motorola Mobility deal the day after, with shares falling 3.27% to 539. And Standard & Poor’s downgraded GOOG from “buy” to “sell” on concerns about the impact of the Motorola deal. Here’s Peter Kafka’s take at All Things D.

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Whatever benefit the acquisition of Motorola Mobility brings Google in the long run, it definitely would wreak havoc on the company’s financials in the short term.

For the year ended Dec. 10, 2010, Motorola Mobility (MMI) had gross revenues of $11,5 billion compared with $29.3 billion for Google. But MMI’s operating income was just $76 million or 0.7% of revenues, compared with $10.4 billion or 35.4% for Google. MMI ended the year with a net loss of $79 million, while Google has a net of $4.2 billion or 10.3%.

During the crudest sort of combination–real pro forma financials for the combined company will be much more complicated–absorbing MMI would have knocked 11 points off Google’s gross margin and 4.3 points off its net.

Financial markets don’t seem overly concerned about this. Google shares fell 6.54 or 1.16% today in a generally up market. Despite the damage to the income statement, the acquisition will have minimal impact on Google’s balance sheet. The company won’t have to take on any debt to pay for the deal and MMI, which was spun off from Motorola only a year ago, would bring no significant debt to the marriage.

Of course, if Google continues on its recent growth path, the financial impact of the acquisition won’t last long. The real challenge will be melding two companies with vastly different cultures and histories.

Why Microsoft WILL Buy Nokia

In a recent post on Why Google had to buy Motorola, I pointed out that both Ben and I had predicted that this would happen because we were convinced that in order for a company to really be successful in tablets and smartphones they had to own the ecosystem of hardware, software and services.

Today’s announcement that Google would buy Motorola’s Mobility Solutions group underscores this thinking. As Google studied the ingredients of Apples success, it became obvious that Apple’s ownership of the OS and then its ability to fine-tune the hardware to deliver a seamless user experience was critical to consumer’s strong acceptance of the iPad and iPhone. Apple uses this ownership to drive amazing innovation.

This allows them to deliver the upcoming iCloud service so that it can synchronize content and data between all OS devices and utilizes the hardware in special ways. And it gives them a platform for future innovation. For example, what if the next version of the Nano has Bluetooth on it and can be used in a wristband/watch option. Since it is IOS based, it would have the new alert system that will be in IOS 5. That means that technically, if you get an alert on your iPhone in your pocket, that same alert shows up on your Nano watch. This is just one example of how Apple can continue to drive innovation at the hardware, software and services integration level. Knowing Apple I am sure they have dozens of these types of things in the works.

Google clearly went to school on this and while they claim that the patents were a key part of the reason they bought Motorola Mobility, the other reason is that they clearly know that by owning the hardware and software they can now drive the innovation of Android from both the hardware and software level and take more control of their future. And while they want others to keep licensing Android, they basically threw their partners under the bus in order to insure Androids long term success. I predict you will see Android defections or at the very least, companies hedging their bets by endorsing a third alternative by the end of Sept.

Now, don’t think that this same thinking has escaped Microsoft. They have to have come to the same conclusion. Microsoft clearly wants Windows Mobile Phone 7 to become a worldwide hit and at this moment, Nokia is just another distributor of Windows Phone 7 in the same way HTC and other are. But if they decide to keep this OS as a pure licensed property and trust the hardware partners to innovate on their own, that boat has sailed. They too will come to the conclusion that if they want Windows Mobile 7 to be the third major alternative to Apple’s IOS and Google’s Android, they will need to own the hardware as well as the software and services.

Of course, this goes completely against their 30 years of history of being a software licensing company. Actually, they have precedent in hardware with the XBOX. But the rules have changed when it comes to mobile and I believe that Google’s move to buy Motorola Mobility has now forced Microsoft’s hand.

I now believe that it is no longer a matter of “if” Microsoft will buy Nokia but instead a question of “when” they will do it to make sure that Windows Mobile 7 can compete against Apple and Google.

Google: Set Top Box King?

Largely overlooked in the initial reaction to Google’s proposed $12.5 billion purchase of Motorola Mobility is the deal’s potential impact on the cable set top box business. When Motorola split the company in two, the decidedly un-mobile set top box group (formerly General Instrument) went to the Mobility unit. The U.S. market for set top boxes for cable and cable-like services, such as Verizon’s FiOS, is split between Motorola and Cisco (the former Atlanta Scientific.)

The cable box has been a huge impediment to the development of really practical systems to get internet video onto living room TVs. Motorola and Cisco build the boxes their cable provider customers want and that means very limited integration with the internet. In the view of the cable companies, Facebook and Twitter are fine, but Netflix and Hulu most certainly are not. And while it is possible to build a CableCARD-equipped device that allows customers to receive both cable and internet TV on a third-party box, resistance by the cable companies and the failure of the Federal Communications commission to enforce its own rules has resulted in a minuscule market for these products.

Google TV is a great example of a product that was choked by the set top box monopoly. The closest Google could come to integrating cable into its supposedly comprehensive service was to use a ridiculous and antiquated device called an IR blaster to let the Google TV unit control the set top box. IR blaster-based products have been around for years, but have never won favor from consumers (for one thing, at least in my house, the little IR sending units keep falling off the cable box.)

So what would Google do with its new presence in the living room if this deal goes through. It could simply follow the Motorola course and go on making the set top boxes that cable operators want, but that seems profoundly un-Googley. Or it could strike a new course, offering the first mass-market home entertainment united that fully integrate cable and internet services. That could revolutionize the business–or drive all the cable operators to Cisco, which has never shown much inclination to rock this particular boat. My bet is that Google will at least try to build the product that Google TV should have been in the first place.

Why Google had to buy Motorola

At the end of the year, when I made my predictions for the New Year, I stated that I believed Google would buy Motorola Mobile. And last week, Ben wrote here in Tech.Pinions about why he thought Google should buy Motorola. We had no inside information on this. But as we have studied how a complete eco system of hardware, software and services are critical to the success of a company bringing out tablets and smart phones, it became pretty clear to us last year that Google, at some point, was going to have to buy a hand set maker if they really wanted to control their destiny and the destiny of Android.

With today’s acquisition of Motorola Mobility group by Google, Google has now closed the loop on building out and controlling an entire eco system of hardware, software and services. With it they can now drive Android in the direction they see fit and innovate in all three areas. Like Apple, they now own the hardware, software and services and can become an even greater force in the future of mobile products.

In his comments on the acquisition, Google CEO Larry Page stated that part of the reason they did the deal was to also gain access to Motorola’s patent pool.

This could have an impact on the suit against Motorola as a starter.
And depending on the patents, it could also help them in the multitude of legal suit against Android out there as well, although it is not clear how much Motorola Mobile has that would related directly to these other Android suits.

But as important as this is for Google and Motorola, it is highly problematic for Google’s partners. Now HTC, Samsung and other licensees will be competing directly with Google/Motorola. And this leaves a lot of big questions on the table. For example, Google uses a lead partner with major new versions of Android. We assume it will now always be Motorola? If so, how does that affect the other licensees?

And, although they claim Android will continue to be open, just how much of an inside position will Motorola Mobility have over the competitors? I have already fielded multiple calls from clients who license Android who are, how do I put this, “concerned” about this news.

I believe that the major fall out from this is that there is now room for a third mobile OS to come out that would give vendors a broad solution they can use without having to compete with Google/Motorola. If I were Microsoft I would be touting Windows Mobile as an alternative.

However, here is a more interesting suggestion. If I were HP and Todd Bradley, I would immediately license the Palm Web OS as an alterative. This is by far the best Mobile OS besides Apple’s IOS on the market and it could become of great interest to Android licensees who feel threatened by this move by Google.

There are still a lot of other questions about this deal, like how will they deal with two distinct cultures and who drives the future of Android given Motorola’s greater experience in mobile then Google has?

But no matter how this turns out, we will mark today as the day that the mobile world changed forever as Google has begun to rewrite their history again.

Further Reading:
Why Microsoft WILL Buy Nokia