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.

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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.

Posted on 08:36PM Dec 03, 2004 |

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A Message to Hewlett Packard's Constituents - on the Demise of HP-UX

It's late on a Friday night, but with yet another series of disappointing announcements coming from HP this week, and the year coming to a close, I wanted to take the opportunity to speak directly to the entire Hewlett Packard community - customers, partners, all.

I've met with many of you over the past year - all over the world. And rather than waiting to meet with more of you at keynotes, customer visits or recruiting events, I figured a single message in a public forum was by far the most efficient means of communicating the following.

HP will only continue to decommit to HP-UX as a source of differentiation. Its recent duplicity around the integration of TruCluster and AdvFS into HP-UX is an enormous disappointment to everyone (except Gary and our friends at Veritas, congrats!). After years of protesting Sun's claims, this abandonment is indisputable evidence that HP-UX is on its way to Hewlett Packard's industry leading collection of dead architectures. We've all watched the demise of Alpha, Tru64, PA-RISC, Itanium, storage - it's now irrefutable that HP-UX is on its way to that same, very crowded boneyard. Along with the systems devoted to running it.

HP is racing to become a company focused on the distribution of other people's technology. Granted, this may represent a viable business model for those best in class, but it leaves customers who've historically relied upon HP systems sitting on a sinking platform. Many customers I've spoken with have wondered what value HP brings to their enterprise - when they've asked for operating system or architecture roadmaps, they've found themselves talking to a "VP, Linux Evangelism." Whose responses to technical questions lack substance without a 3rd party representative in the room.

HP's crisis will continue and deepen. Independent of the constituency, HP has destabilized its business with ambiguity. Questions like "what happens next?" erode everything from revenue opportunities to career discussions. As an HP customer just said to me (and my apologies to the global audience that may not understand the reference to Charlie Brown), "Increasingly, HP is like Lucy with the football and frankly, I'm tired of feeling like Charlie Brown."

What should you expect from Sun? We believe our insistence on the value of R&D and long term commitment, our ability to present a vision, to evolve community models, and to deliver on complex product integration and systems evolution, all represent opportunity. Opportunity for customers, partners, and current - and future - employees. The introduction of Solaris 10 and its 128-bit ZFS, on our Opteron systems, and on a revolutionary (and completely binary compatible!) multi-core SPARC platform that is set to redefine enterprise computing, continues to generate buzz for our software business, our systems business, our storage business, and fuel the growth of our services business. While driving confidence, not instability, among customers and partners.

Confidence, commitment and execution are the three things every Sun constituent should expect from us. We'll deliver the systems, the innovation, the partner models, the services and ultimately the results that represent the best source of opportunity for everyone involved. We have never had a stronger product line to solve the problems faced by the developers, deployers and operators of network services. And with another UNIX falling by the wayside, it's increasingly evident the OS wars are down to three - Microsoft Windows, Sun's Solaris, and Red Hat's Linux. Not surprinsgly, I agree with the aforementioned HP customer. Enough is enough. We're happy to help all HP's constituents move on in life - better you walk away from the football, than have it walk away from you.

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ps. And just to preempt the inevitable responses - before HP goes touting how they're migrating Sun's customers to HP platforms, exactly which platforms would that be? Itanium? If it's to another company's operating system, you're making, not refuting, our point, that HP's exiting the game... but do keep the examples coming, our salesforce loves the leads.

Posted on 09:28AM Dec 03, 2004 |

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