Original URL: http://www.theregister.co.uk/2009/04/02/subsidized_netbooks/

Subsidized netbook model could sweep away 20 years of PC history

Attack of the Killer Laptot

By Faultline

Posted in Hardware, 2nd April 2009 10:18 GMT

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.

We are inordinately suspicious of any market which is made by five or six decisions globally, the way the Windows Market was made. Back in 1980s and 90s you could either buy an Apple Mac from Apple or a Windows machine from everyone else. Microsoft then resorted to antitrust to keep things that way, creating a bundling mentality that almost tied up the entire computer industry, in the process stifling innovation.

At almost no time were there a selection of operating systems and you felt free to go out and buy the one you liked the best. Overnight it was down to two, and one was by far the cheapest. At first.

For instance, no one has opted for Windows phones very much, and Windows has a small and faltering market share, and yet operators are cutting deals with the new batch of PC manufacturers, who to a man have come out with Windows Mobile based handsets, almost exclusively. So the market has voted and said it doesn’t want Windows on a phone, and some operators have said “tough” - we like it, you lump it.

Now the netbook market gives us an opportunity to change all that, but not with a bundled, operator enforced exclusive. All we would end up doing is replacing Microsoft with Apple. Far better if it was replaced with Android, but better still if consumers continued to have the choice.

However, slap bang in the middle of this is an opportunity to usurp the Microsoft Intel crown in the process. If phones become MIDs and netbooks and they are selected and funded throughout this recession by cellular operators - and they prefer the consumer appeal of Apple and Android over the enterprise appeal of Microsoft - then as the netbook market takes huge bites out of the notebook market, those bites could be Apple OS and Apple hardware, or Android and Linux based with chips from Qualcomm or Boardcom instead of Intel. We know that today Qualcomm has at least a 12 month lead in watts per mip over Intel, and it does not have the loyalties that Intel has to Microsoft (it is close to both Microsoft and Google and would also be close to Apple if Apple would let it).

So there is too much at stake - the chance to upset the global hegemony of the dominant software supplier and chip maker of the PC era.

Which is perhaps why Apple will come out with a netbook and why AT&T WILL decide to source it for $99 and why many, many such deals will be done, to the immediate benefit of many consumers, but to their long term detriment in terms of future choice. Already this battle has lengthened the lifetime of XP due to Vista being unable to run on most of the chips targeted for netbooks, and US research companies reckon that there will be 200 million netbook class devices shipped by 2013. If half of them don’t need a PC as well, think of the damage that will wreak on the Microsoft and Intel share prices.

Already in Europe such subsidy moves have been made on Notebooks, but none so far are Apple based, and no one has had the spectacular success that Apple’s iPhone has brought AT&T. Overnight, with the right netbook design Apple could signed 100s of operators looking to cash in on the Apple panache.

Meanwhile we also hear that, just as we have suggested above, Dell is lining up to be the next MVNO in Japan offering its own bundled netbooks and notebooks. If it can succeed in Japan, where subsidies are unheard of, it can succeed in any low subsidy market and probably afford to play in subsidized markets once its sees how big the demand is in Japan.

This will trigger a trend for device makers to move beyond partnering with carrier brands, and actually launch their own virtual operators. This is not - as yet anyway - a way to sell the Dell smartphone designs that cellcos reportedly rejected, but a way to offer notebooks with bundled HSPA access and call plans. The first launch is reported to be in Japan, where Nokia has also launched an MVNO for its luxury handset brand, Vertu.

Dell is not officially commenting, but many sources are reporting its latest strategy. In this new strand of the MVNO model, the network owner provides a connection and reaps a fee, usually based on data usage, but remain invisible to the end user - with the twist on traditional MVNOs being that the brand belongs to the device. Amazon's Kindle has been an important precursor, and last week Sprint said it expected to boost its business from supporting services running on wireless-embedded products from music players to business communicators.

As carriers build out 4G networks, with high bandwidth and often with open access models, they will be increasingly happy to find partners to use excess capacity.

Dell, like most PC makers, is looking for new channels as the traditional desktop and notebook markets contract and come under threat from smartphone/PC hybrids. Already, they are selling wireless laptops via carriers, following the cellphone subsidy model, and pushing into cut-down netbooks.

Dell's first experiment with a full MVNO, which gives better customer control and brand awareness than a cellco deal, plus a share of the wireless data revenue, is confined to Japan, and will run on the NTT DoCoMo network, which will also be used by Nokia Vertu. Nokia is also said to be pursuing the direct-to-consumer route for its handsets, via an MVNO deal, in India.

The Dell pilot in Japan will be emulated elsewhere, insiders said, assuming that it succeeds in its launch country. It will involve notebooks with built-in HSPA cards, priced between $500 and $2,000, shipping with a fixed amount of mobile broadband access. After using this up, customers buy additional access with a credit card. The offering will launch this summer.

Copyright © 2008, Faultline

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