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.