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Subsidized netbook model could sweep away 20 years of PC history

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While many stories this week rest on whether or not Apple will bother with a netbook (Steve Jobs has said the iPhone does everything a netbook does anyway, and was reported as saying “We don’t know how to build a sub-$500 computer that is not a piece of junk”), the issue really is whether or not you belong to the school of thought which says every network needs to have specialist operator supplied equipment or whether instead, you are a believer in open networks.

One rumour this week initiated by tech blog Boy Genius has it that AT&T will launch an Apple netbook subsidized down to $99 in the US, while in the UK Orange appears ready to go one step further and subsidize the bulk of a notebook computer from Apple, taking some €400 to €500 from its list price in return for a two year mobile broadband contract.

The issue with a netbook is that it should be cheaper than a small notebook computer, probably not have an optical disk, run on a lot less power, with a less powerful processing chip, most likely based on cellular style ARM cores, and it should stay connected to the internet over cellular broadband so that someone can use it for an entire day on a single battery charge. Some netbooks will have no disk storage (just using flash) so that the device is lighter and less power-hungry, and some of them are little bigger than two handsets placed together or as large as a very small notebook computer.

But there are many other issues. Notebook suppliers are not used to having their outputs subsidised, but have got used to adding an endless line of new features to try to get consumers to pick them over the competition. They would love to be subsidised and they would love to halt the endless progression of expensive differentiation. Should it even be allowed in the modern era for operators to specify and control the devices which attach to their networks? Especially in the light of what we’ve seen about what happens to prices and consumer service pricing when they do.

Take the simple case of US cable operators. Customers can only use the set tops they deliver and as a result the customer experience stays the same for an entire decade – with no innovation whatsoever. Also, cable packages are always so rigid. Do you want 100 or the 150 channel package – you can never just choose channels. You cannot decide how many tuners you have, and the prices are jacked sky high by the set top manufacturers who control the Conditional Access systems – and these systems are used to deny device competition.

No new business models emerge under this type of set-up, and one vendor or at most two dominate the scene for 20 years at a time. Where is the impetus for innovation? In that instance the impetus came from TiVo when it cut a deal with DirecTV and began stealing customers away from the cable operators in droves.

Suddenly TiVo was flavor of the month for a while on both side of the satellite-cable line, but in the end Motorola makes more money out of the invention of DVR than TiVo, encouraging that arm of Motorola to go back in its shell and once again resist all innovation.

Now it is true that cellular businesses tend to be more competitive, at least right now. But can we imagine a future where we are stuck not for 12 months, not for 24 months, but for 36 months, with the same device, the same voice and data phone rates, and the pace of innovation on devices means that we cannot get our hands on new services for up to three years at a time.

The cellular industry has only really just begun working with two-year contracts, but already as the recession mounts it is pushing for those 24 contracts every time it gives a concession to a customer. How long before the first 30 month contracts emerge, or 36 months? And then we might just as well, from the consumer and regulator point of view, buy our own device on a hire purchase contract, and take it with us to any network we like.

Which offer do you think consumers would prefer; one from AT&T which says you can have a free netbook as long as it's attached to the AT&T network and as long as you commit for two years on contract at an inflated price and there’s a choice of Apple or Apple? Or do you think consumers would like a deal from any number of suppliers, such as Dell or ASUS which says you can pay for the device over one, two or three years financed, and pick which operator you go with on a pay as you go, SIM only deal; or a short term or existing contract and swap networks whenever the deal is up? Consumers may never get offered that latter deal, but we think they might prefer it.

If you are tied in for a long time to a network and there is a recession and the operator decides not to invest in its network, you can’t express your displeasure by leaving if you are on a long contract. Much the same can be said of vendor-based MVNOs. If you have a contract with Nokia or Apple for a phone and a contract, you are in exactly the same boat, you can change neither and that’s likely to be true for some years.

Which is why regulators should do everything in their power to promote open networks. It shoves the arrangements for funding a device right back where they belong, on a consumer, and they can choose to have it from the operator or can buy it outright or can acquire it (probably not in a recession) through lease or hire purchase.

There’s another reason why it is so unhealthy. Apple may, by doing a deal with both AT&T and Orange, gain huge market share variation overnight in the netbook/PC market, the same way that its design prowess and its operator exclusives took it to the top of the desirability pile for smartphones.

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