Netbooks: Up from Phones, Not Down from Notebooks

Last week I began a discussion of whether Linux will survive as an OS for netbooks.  I received a number of comments, some highlighting which netbook OEMs favored which Linux distros, other despairing at the paucity of verifiable market numbers (a distress that I share).  One reader pointedly chastised me not to

“overlook the fact that, after being caught off guard by netbooks, MS bent over backwards to get XP-based netbooks on the shelves. Then, they forced the Linux netbooks off the shelves with exclusivity agreements and strong-arm tactics. It’s rather difficult to sell Linux-based netbooks when the retail outlets have been bullied by MS to only stock XP-based netbooks.”

I am actually keenly aware of Redmond’s “negotiating skills”.  In the mid-1990s, while I was at Acer Latin America,  our entire group was audited by Microsoft.  It seemed that our mix of DOS, Windows and Windows for Workgroups was too skewed towards the command line for Redmond’s bottom line.   Our channels licensed a lot of DOS, principally to enable installation of Netware, UNIX and yes, also Linux, especially in Brazil where I was based.  The audit lasted three months and actually shut down several of Acer’s smaller regional subsidiaries. We “got the point” but didn’t change our OS mix until Window95 appeared a year later.

Mobile Phone (Volume) Lust
I think that one strategic error made by purveyors of Linux netbooks was to covet the volumes of the global mobile telephony market while following the business models and channels of the legacy notebook marketplace.  Linux fans – .orgs, Linux ISVs and device OEMS – unfortunately approached the netbook opportunity as a downward extension of the desktop and portable PC business, with volumes of 297M units in 2008 (IDC).

Instead, the Linux ecosystem needs to envision netbooks (and MIDs and tablets) as building on the worldwide mobile handset business, with its 1.28B annual unit shipments (Gartner) the most lucrative slice of which, smart phones, constitutes 14% (ABI) with 20% annual growth rates.
The structure and dynamics of the mobile handset market depart from the PC business on several parameters:

• End users (a majority in the US) acquire their devices from service providers, not from the retail channels favored by PCs and notebooks
• Mobile operators and carriers view handsets first as service delivery vehicles and second as applications platforms
• Operators subsidize handset acquisition costs, making up their margins over multi-year service contracts

This time-worn model is beginning to break down, however, challenged by flat and falling voice revenues, encroaching VoIP services from “virtual” network operators, and surging EDGE and 3G data traffic that threatens to overwhelm existing network capacity.
As a means to preserve flagging ARPUs (Average Revenue Per User), mobile operators and regional carriers are accelerating next-generation (4G) rollout, emphasizing data, not voice, on WiMax and soon on LTE (Long-Term Evolution) in select markets, as well as experimenting with pure data business models over existing WiFi access points.  Most interestingly, after lackluster efforts of marketing WiMax and WiFi network interface cards to existing notebook owners, operators like ATT, T-Mobile and Verizon are instead following their historical playbook and bundling Linux-based netbooks with data services subscriptions through their own channels.
This bundling, unlike CE/Retail channels, actually has the ability to leverage the presumed virtues of Linux-based netbooks:

• Lightweight BoM further subsidized by data plan subscriptions
• Greater opportunity for operators to preserve and build on brand equity and differentiate through custom applications and services (as with mobile phones)
• Built-in network access and ability to leverage the Cloud

Such programs have the further charm of driving 3G+/4G revenue in the short and mid-term preserving ARPUs with data (rather than voice) and for building subscriber loyalty.

But will operators build out the mainsream versions of these programs using Linux-based devices?  Can developers and purveyors of Linux sieze this opportunity and stay in the netbook game?  Let me know what you think as we continue this discussion next week.

Filed under: Linux, Nokia, mobile, netbooks, open source

Will Linux Survive on Netbooks?

Linux on netbooks.  What a concept!  Same great experience, but less filling.  Not!

What a difference a year makes.  After initial unbridled enthusiasm in 2008, Linux-based netbooks, MIDs and similar devices are taking a beating, delivered by, you guessed it — Microsoft. Consumers avoid Linux netbooks, manufacturers despair over immovable inventory – only free software enthusiasts seem ready to adopt these orphaned devices.
So why isn’t 2009 the “Year of Mobile Linux”? On paper, the case for deploying Linux on netbooks and MIDs looks compelling:

• Lower Bill of Materials (B0M), both from shedding the “Windows Tax” and from more minimal provisioning of DRAM, HDD and client-based applications

• More flexible system architecture – no lock-in to the “Wintel-PC virtual machine”

• Customizable look-and-feel for OEMs (Original Equipment Manufacturers) eager to distance their brand from Microsoft

• Ability to leverage web apps (like Google’s) and emerging Cloud Computing resources

Marketplace reality quickly proved that the best-laid plans of OEMs and ISVs often go awry.  In the first half of 2008, OEM enthusiasm for Linux-based netbooks was so great that Windows (XP and CE) garnered only 10% of the pre-installed market.  By Q1 of 2009, Windows had come back with a vengeance, boasting 96% of netbooks shipping with Windows-family OSes (Source: NPD Group).
Linux Netbooks appear to be doomed to repeat the sad history of desktop Linux.  However “free” netbook Linux may be, consumers have not found it sufficiently compelling to leap across the historical functionality gap (perceived or real) from Windows.  Moreover, as netbook capabilities creep up on low-end notebook specs, consumers expect to be able to run familiar Office applications, and to browse, view and play web sites and multimedia content just as they do on Windows desktops.
Despite significant advances in content handling over earlier generations of desktop Linux, netbook end-users found Linux-based devices unwieldy and apparently unreliable. Not only did new device sales falter, but buyers returned the devices in droves.
Quite simply, the rationale for Linux-based netbooks proved irrational in the real world:

• Leveraging Linux for a lighter BoM (Bill of Materials) proved less appealing when Microsoft cut XP licensing fees and ever-cheaper memory, storage and CPUs closed much of the notebook-netbook capability gap.

• Netbooks with full PCI buses and other PC-like capabilities eased XP installation, especially for OEMs already familiar with notebook design, like Taiwanese ASUS and Acer.  Asian Tigers, while adopting Linux for more deployed embedded applications, are still more comfortable with Redmondware for mass-market consumer products.

• Consumer reaction to first-generation netbook-centric look-and-feel proved unenthusiastic.  Ubuntu, while a great Linux desktop, failed to impress mass market users; Moblin 1.0 wasn’t ready for prime-time and Mobile 2.0 arriving in 2009, was too late.

• Netbooks intended to leverage emerging Cloud Computing relied on the vagaries of end-user network and cloud access, sending consumers scurrying back to client-based productivity software on better-provisioned Windows-based devices.

The combination of these factors, when pushed through multi-tier consumer product sales channels, proved to be a retail nightmare and a dead end for Linux and Open Source.

Next week I’ll again pick up this topic, comparing how Linux the mobile Linux dynamic differs depending on whether you come “down from notebooks” or “up from mobile phones”.

Filed under: Linux, mobile, open source