Making Sense of IBM’s Departure from the PC Industry – and Network Economics

How much did your cellphone cost you? What’s the average price of a handset? What’s the average operating margin for a carrier’s handset business?

The answers to those questions give you no clue whatever to the health of the handset industry. Why? Because the devices are sold to consumers as part of subscription calling plans, whose long term value is sufficient to drive some relatively crazy discounting in the carrier’s retail outlets (go check them out, now that carrier’s kiosks are popping up everywhere). The same handset from multiple carriers can range from free to $799. And as mobile data services increase in value (even if most folks over 30 don’t even know what a ringtone or game download is), the insanity (or sanity) at the checkout counter will only quicken.

And as I was saying on Steve’s Gillmor Gang, give it a year, I’ll make a big bet, you’re going to see the same thing begin to happen in the PC industry. Will the average selling price (ASP) of a PC continue to meander south? Yes. Unrelated to component cost. Will it go to free, like handsets? Absolutely. In exchange, consumers will sign up for network plans, DSL, cable, you name it. On PC’s, or more likely equivalent dedicated devices branded by carriers – just as in the handset industry, where carriers are increasingly deploying ‘branded’ handsets. It’s been a tad tougher on PC’s when they didn’t control the software load, but it’s just a matter of time.

This is the foundation of the pricing distortion that occurs when networks, time and value blend. It’s how Echostar and DirecTV subsidize satellite dishes, cable companies subsidize set top boxes, and how carriers sell handsets. Take out the network delivery part of the equation, it’s how magazines sell subscriptions (first 6 months free). The spot margin is less interesting than the number of subs, ARPU, churn – and longer term EBITDA. Terms the PC industry will learn to respect, it’s inevitable. Maybe not in the enterprise, where purchasing agents are fixed in their ways, but surely in the consumer marketplace, where “NO MONEY DOWN!” is popular signage.

So what’s happening to the PC industry? It’s moving from the old world, in which one buys a PC and cares a great deal about its comparitive hardware features (does it have a DVD player?), to one in which the hardware is nearly identical, and the value’s moved to services available through the device. Over the network. Battery life matters more than processor speed. Size of display more than disk. Access to Yahoo! Personals matters more than all of the above.

To me, the sale of IBM’s PC business proves the point – the company that invented the category (me, I like to believe they cloned Apple’s business), is now exiting due to poor financials. And attempting to sell it to a company whose principle competitive differentiator is cost (and geographic/political proximity to a growth market). It’s my view that operating a PC only business doesn’t really make a lot of sense – at least in the long run (which is why Dell’s moving ever closer to selling microwave ovens, and still trying to convince the world they can run their supply chain on 1-way Xeons – hm, note to self, someone should ask their CFO on their next earnings call what systems run their supply chain).

But we’ve been in the post-PC era for a few years now – ask a teenager, which would you rather have, a mobile phone, or a laptop, you’ll get a pretty crisp answer (the former). That’s partially why handsets outship PC’s, about 10:1. Yes, 10:1, and the gap is widening.

Think this is the end? No way. Just go look here, and imagine this included in anything that moves, sold to a consumer. Whatever the network touches is subject to subscription pricing. Ridden Jet Blue or ANA recently? Would you pay for pay per view on a train ride? Want the Wiggles in your new SUV? All those are near enough to start distorting the economics of planes, trains and automobiles – for companies that know how to look at the network as a means of redefining traditional business models.


Other interesting tidbits – True to predictions that Red Hat would take advantage of their proprietary distro to lock customers and raise price, even Dell’s getting upset about it. But someone should explain to our friends in Texas how bringing Debian or Gentoo into the picture won’t help: Red Hat has tipped the linux market, and the lack of ISV support on anything but Red Hat’s Enterprise offering means customers are feeling trapped, and Dell’s stuck – that’s why we’re open sourcing Solaris, and offering to run linux native – at a lower price than Red Hat’s proprietary distro. And, of course, a lower price than Dell.

Leave a comment

Filed under General

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s