We’ve already seen some fragmentation of video distribution services and it begets the question if this is just the beginning.  Further fragmentation will have some common characteristics.

First, I believe this further fragmentation will happen around lower dollar value digital assets.  These types of digital assets have the likeliest chance of propagating further fragmentation because their appeal will be strongest among niche segments of the population as opposed to mass audiences.  Therefore, these lower dollar value digital assets will generally have older publication dates and be less likely to potentially damage existing owner-distributor relationships – like the relationships between studios and MSOs.

Secondly, as alluded to above, fragmentation will occur (and ultimately be most successful) where niche audiences exist.

Third, fragmentation makes sense where there is a concentrated appetite for given digital assets (ie content genre) and there is also a wide assortment available to distribute.

Fourth, fragmentation makes sense where renting v. owning makes sense.  One can easily argue we are already there on this fourth point.

NetFlix is of course the first-mover here and I think their recent price increases were a move to increase the dollar value of the digital assets for which they have rights.  But if we apply the NetFlix model to other lower dollar value digital assets we can imagine low cost streaming services for niche content like fitness videos, certain foreign films (by language for example), or other niche content.  These type of content have concentrated value within the niche.  So they won’t damage owner-distributor relationships, but they’ll be able to support a monthly subscription fee.

As Internet-enabled TVs generally become more available or if traditional cable content is eventually distributed via apps across app-enabled TVs such that users can access different feeds of content seamlessly across app platforms then these isolated services (and thus fragmentation) will gain steam.

 

 

BestBuy recently announced they would launch a connected TV under the Insignia brand using the Tivo user interface.  This is a great example of the Innovator’s Dilemma in action.

The Insignia brand is one of Best Buy’s house brands.  It (like other private label brands) is frequently used as the opening price point for devices.  House brands tend to do this best for maturing categories – where consumers have become comfortable with how they use their devices and are largely looking for replacement devices.  It also works for late adopters who are looking for their first purchase in a given category (and might be more price sensitive).  In both cases, these consumer segments are looking for low-priced options.

The Insignia brand has grown to represent some 10 percent of the television market.  Moving into the Connected TV space is an interesting move for the Insignia brand.  It is certaintly a growing segment of the declining TV market. In the first half of 2010 they represented about 8 percent of total shipments. Just a year later the share of connected TVs had grown to about 20 percent of total TV shipments.  While they’re grown significantly in terms of shipment share, they still represent a relatively low share of the installed base.

The move will allow the Insignia models to enter a growing segment of the TV market.

IHS iSuppli recently projected sluggish growth for single-purpose consumer tech devices like MP3 players, PNDs, and digital cameras.  At the same
time they expect multi-function devices like smartphones and tablets to enjoy strong double-digit growth over the same horizon The IHS iSuppli statement quotes, Jordan Selburn as saying,

The success of multipurpose electronic equipment, often coming at the expense of devices dedicated to a single task, is reshaping the landscape of the consumer electronics industry… In many cases, users can replace a slew of dedicated systems with just one multipurpose device, gaining functionality and portability while simultaneously saving money… The story of consumer electronics is an ongoing survival of the fittest, and multi-tasking systems such as media tablets will have a hand in turning yesterday’s hot consumer electronics gear into tomorrow’s fossils,

While their trends and predictions are all directionally accurate and something we’ve been pointing to and discussing with clients since early last year as we’ve tracked the monthly OEM data, I think IHS iSuppli and Selburn are overly strong on the causality of these declines.

What is primarily driving the decline in these categories are the individual structural issues these categories face directly.  For example, according to CEA Research, digital cameras are owned by 79 percent of households and these households own on average 1.8 digital cameras.  Eight-nine percent of self-identified early adopters own a digital camera and even 73 percent of self-identified late adopters own one.  Fifty percent of the households who do not own a digital camera say they’ll never buy one – suggesting we are extremely close to full market saturation for this category.  Digital cameras will never be owned by all households and this has nothing to do with the introduction of other devices.  Very few products ever enjoy 90+ percent ownership rates. The primary decline in digital camera sales isn’t necessarily what is happening in other categories – it is a function of what is happening in the camera category itself.

PND growth slowed and then outright declined largely because the technology is increasingly integrated into vehicles.  I suppose the argument could be made that this is the ultimate multi-function device.  MP3 players are owned by half of US households. We know MP3 players aren’t  for everyone.  In fact, 56 percent of non-owners still say they’ll never own one. Despite the fact the technology has been in the market for over a decade, only 37 percent of self-identified late adopters own one. Here again, the category declines as a result of hitting market saturation and not necessarily because there are alternatives.

Certainly, single purpose devices are impacted by Swiss Army Knife-like devices. Calculators likely have lower replacement rates (and subsequently growth rates) because of the ubiquity of computers. Multi-function printers represent a large share of the computer printer market.  And I’m sure paper calendar
sales have slowed since the introduction of digital alternatives. Some of these changes might be more a result of living in an increasingly digital world than as a
result of multi-function device substitutes. Still, the impact is noted. About a quarter of the households who own a digital camera say they’ll never buy another digital camera. This rate is consistent with many other products (18 percent of households owning a smartphone say they’ll never buy another one). Still this result does suggest some households will not replace/upgrade their digital cameras because of alternatives.

Single-purpose devices have through the history of technology existed – even with the entry of multi-function devices. Single purpose devices have (and always will have) an important place in the market. The article/report cites Cisco’s decision to shutter Flip.  By all accounts, Flip was highly successful. It was profitable and owned 40 percent of that market.  Cisco closed the business unit to send an important message to the market generally and shareholders specifically that they were committed to moving away from experiments in adjacent consumer businesses and return a full focus within their core enterprise business.  Despite high ownership rates of digital cameras (most if not all of which shoot video), Flip was able to do well.  It did one thing and it did it well.

e-Readers are another great example of a single-purpose device that can thrive despite the introduction and existence of multi-function alternatives.  e-Readers continue to grow rapidly despite the success of products like the tablet and the smartphone – both of which enable mobile/portable reading.  Recent research shows consumers have a very low interest in considering other devices when they shop for an e-Reader – suggesting consumers largely find no alternatives to an e-Reader.

These are just a few examples of devices that have (and continue to) do well despite the introduction of new multi-function devices.

Earlier this week, the New York Times reported on a study by Forrester.  The key finding: “Even though just 9 percent of shoppers own tablets, sales from tablets already account for 20 percent of mobile e-commerce sales and 60 percent of tablet owners have used them to shop.”  Certainly tablets are set to have a disruptive impact on a variety of services and devices, but it is important to frame “mobile” in the correct light.

The term “mobile” is being thrown around too loosely.  Mobility is a relative term, but it is frequently being used in the absolute sense.  There are several device attributes that influence the degree to which a device/experience is mobile. These include device size, power or battery life, and availability of content. Size and batter life are self explanatory. The smaller a device the higher degree of mobility it affords users.  This of course assumes some constant level of usability.  One could easily imagine a device so small it isn’t useful to the end user. In this way, size could have asymptotic characteristics.  Size influence on the device’s degree of mobility can also be general (applied to the entire size of the device) or it can be specific to an attribute of the device like screen size, antenna, etc. For power and battery life, the great the longevity of power the greater the degree of mobility provided by the device.  Power longevity also doesn’t necessarily mean battery life. The in-vehicle experience readily provides 12V power to devices used in and around vehicles, but these are still mobile devices in the general sense for which we are using it here.

The degree of mobility a device provides is also a function of the content it provides the end user.  This content can take many forms and can be delivered in many ways.  Content includes video (ie Portable DVD players) and audio (ie portable tape players to MP3 players).  It could include maps (ie GPS) or other information (ie data available on the Internet).  It can be delivered to the device physically (ie tapes, CDs, DVDs) or digitally.  Content delivery influence on mobility is also a function of time.  It can be delivered before the device moves into a “mobile” state – this is generally the case with devices requiring physical media.  But content is of course increasingly being delivered while the device is in a mobile setting using spectrum.  This use to be only really applicable to radio and some TV, but is increasingly applicable to all forms of content. The greater the access to content, the greater degree of mobility the device can provide.

I’ve written about curation and discovery in the past (here and here). a new site/app, Trover, is all about curation and discovery and a good example of this trend.

Data from Nielsen on Hulu and NetFlix users (here and here). Not too many surprises though I was surprised by this:

half of all Netflix users connect via a game console (Wii, PS3 or Xbox Live)

 

I’ve written in the past about Amazon’s (eventual) entry into the tablet world.  Some interesting research from Retrevo consistent with points I’ve made in the past. First, consumers have grown quickly comfortable with Amazon as an OEM. You’ll recall that the original Kindle was panned heavily by critics, but consumers have warmed quickly to Amazon devices. As you can see from the chart, 55 percent of respondents interested in a tablet say they would seriously consider buying a tablet from Amazon.

The results of the study are also consistent with a point I’ve made repeatedly on differentiation.  In order to compete in a quickly crowded segment one must differentiate.  It isn’t just that OEMs are competing with Apple in this space  – in order to succeed in the tablet segment, OEMs must bring to market something different.  They can differentiate by screen size, form factor, feature set, or price.  Until now there has been minimal differentiation and I’m not sure there is enough flexibility to compete by differentiating form factor or feature set.  There might be large enough segments of the population interested in screen sizes less than (or more than) 10 inches that there is still room to compete by screen size. Ultimately, I think the most likely place to compete will be price (assuming the user experience is comparable). The results of the study suggest half of those interested in a tablet would consider an Android tablet over an iOS tablet if it was priced below $300.

The FT reports on the excess inventory in certain parts of the tech supply chain. Carlo Bozotti, the CEO of STMicroelectronics, summarizes it perfectly, “We saw  overbooking by some customers in April, as they tried to protect themselves from  shortages of certain components. That led to a correction in June.”

This is exactly what CEA reported immediately following the disasters in March after talking with dozens of OEMs throughout the supply chain.

CEA’s earliest analysis in March suggested the companies around the impacted area were very far up the supply chain and any impact would most prominently be felt in calendar Q3 when the supply chain was drained of inventory and the impact had time to cycle down to companies lower in the supply chain.  But as we noted, companies were quick to divert production and tap capacity outside of the impact areas.  The economic slowdown also slowed/altered demand within certain markets such that there was no major systemic impact on the tech supply chain.  Still, immediately following the disaster there was overbidding.  This is common.  When supply tightness exists either because of supply disruptions or because of a stronger than expected uptick in demand, companies tend to overbid their real number in hopes they are allocated the amount of supply they really want.

Excess inventory in the supply chain will (naturally) put downward pressures on prices.  First because some companies will destock now there is greater certainty and clearity up the supply chain and they know capacity is readily available if they need it.  Secondly, because companies are inclined to get agressive with pricing during soft patches.  Companies have been hesitant to discount significantly over the last few months even given the economic softness. The lack of visability up the supply chain had left them uncertain they would be able to fulfill orders if implemented pricing promotions would have been successful in driving volume.

 

At the end of the month, Toys“R”Us will begin selling Amazon’s Kindle (see Retailing Today, Mashable, Reuters, LA Times). This is a natural extention of its existing non-Amazon retail strategy (which already includes Target, Best Buy, RadioShack and AT&T stores). More importantly, I think it targets an important segment of the population primed for an e-reader experience but who haven’t had the chance to express that interest.