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.

  1. Hardware vendors wanted cheap Windows XP, and they asked for it in the only way that would get MSFT’s attention — releasing Linux-based netbooks. Now that they have what they want, Linux on the desktop is back to its tiny but persistent niche until the next vendor wants something and decides to run up the Linux flag to get it.

    • oiaohm
    • May 19th, 2009

    Problem here Don Marti. Linux flag raising works.

    MS is currently cutting staff faster than any other IT company.

    What stops Hardware vendors raising Linux Flag against Windows 7 and pushing its price down as well. Problem nothing.

    Did those hardware vendors remove Linux completely most no instead going for fast start versions of Linux.

    Important question what is MS break even value of Windows. MS is dumping a lot of software into a lot of markets for nothing because they cannot get a price because of Linux.

    Remember from the art of war. Its not the amount of land you hold. Its the key bits of land and having the resources to maintain it.

    MS risks being staved out. Who needs to beat a company that could collapse under there own weight. Linux has won the netbook round by forcing MS into a loss game.

    • rich
    • May 19th, 2009

    I’m using my Linux-based eeePC for just about everything, except power-intensive stuff. I make phone calls using Skype but I don’t receive calls. If my netbook had the battery lifetime of a phone, I would use it to receive calls too by leaving it on standby, using a Bluetooth headset, to complete the cell phone analogy.

  2. oiaohm, I have to agree with you that shortly MSFT will only be making a profit on a relatively small fraction of software copies sold. Copies sold in low-budget markets and for cheap computers will either go for a token price or they’ll throw more marketing money at those sales than they earn. But they’ll still be a viable company on the profit from the high-end 20%, and all the cheap copies out there will help them keep their network effect with hardware and ISV support. Linux servers beat Sun hardware on price, but MSFT’s ability to price discriminate means that Linux desktops/notebooks/netbooks will have to beat them on something else.

    • Ric
    • May 19th, 2009

    I think Bill makes a good point. Particularly relating to mobile. Maemo anyone? I am a WinFan on my computing platform but I am absolutely NOT on mobile and would pick anything BUT their mobile crap. Nokia got on board with Maemo and that fervor looks to be cooling, however, for consumers like myself that hate the Telcos and what they’re trying to shove down my throat and gouge me for … Linux MORE than fits the bill and I love it on my internet tablet. There is more than enough mobile dissent out there, for Linux to capture share in the handheld environment.

    • TK
    • May 19th, 2009

    I cannot fully agree with your statement that netbooks should be positioned as upgrades from mobile phones _as they are built now_. Unless they come with straightforward firmware and software that is fully integrated with the OS for making easy phone calls on the cell network, they really cannot be positioned that way. In fact, they are not readily available enough – in terms of size, startup time, and portability – to really be compared to smart phones.

    Think of this, a person would use the network’s data access to grab some quick information or send a quick email, but that same person would expect the smart phone to function easily and perfectly _as_ a phone.

    Netbooks as they are currently being built cannot compete as such.

    • a-non-e-mouse
    • May 19th, 2009

    >>Copies sold in low-budget markets and for cheap computers will either go for a token price or they’ll throw more marketing money at those sales than they earn.

    Not necessarily, as long as they can “convince” mainstream businesses to adopt Windows 7. That’s where they can rake in $$. They can do this by “convincing” suppliers to ship with Windows 7 on their desktops and laptops or get no/expensive alternatives. They probably won’t hit big targets with clout at first, like Dell; they’ll go after smaller suppliers who have no chance of surviving a dispute with MS. Once a sufficient percentage of the market has been “convinced”, MS will completely phase out XP. As for Linux, as long as no well-known examples of mainstream usage exist (netbooks are all but dead in that regard), MS FUD will become “popular wisdom” (with MS “negotiating” handling the supply side of the equation) until Linux goes back to being regarded as only a geek/hobbyist OS.

    Nothing would make MS happier to have Linux be like the AmigaOS (technically “alive”, but for all practical purposes, dead).

    • oiaohm
    • May 20th, 2009

    Don Marti. Maintaining software has a cost.

    There is a zero point were even doing no marketing to keep the software operational costs so much. Secuirty patches don’t make themselves from thin air. Creating documentation so coders know how to use new features also does not come out of thin air.

    Linux needs only to provide enough pressure on MS markets that they cannot make enough income to win. They have locked a few markets. Just need to price lock more.

    Next wave of pressure will not be desktop or netbook it will be server. In particularly small business server.

    IBM, Cisco and Oracle are gearing up to take on that market. Welcome the next flag raising one of MS most profitable departments under attack.

    Hardware with software combinations also expect NAS markers to enter this game to.

    Then there is the market MS cannot enter without risk of death. Embedded on motherboard. Income there is about 1 cent per Unit.

    Linux has raised a flag there and MS has not been able to counter.

    This market is also growing for Linux. Linux in a lot of the devices out there Linux has not gone just moved deeper into the hardware.

    Linux is regrouping. Netbooks are a tip of a iceberg. Up until them everyone said it was impossible to sell Linux desktops of any form in large numbers.

    Linux has not lost retreating into motherboard is not losing its changing the game.

    Question is how many flags does Linux need to stand up before MS is dead in the water.

  3. How about bootable usb keys
    disguised as mobile phones,
    and diskless computers
    working together? Every computer in the world becomes the user’s computer —
    to borrow the slogan of the Japanese product
    It’s something that truly brings convenience to users,
    and yet something that MS will refuse to compete with.

  1. May 18th, 2009
    Trackback from : Open Source mobile edition
  2. May 20th, 2009

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