Over the last few weeks both Google (see Nexus Tablet and Nexus Q) and Microsoft (see Surface) have announced major hardware initiatives.  In both cases, these hardware initiatives have been primarily focused on the mobile/tablet ecosystem.  Even Microsoft’s recent software announcement – Microsoft SmartGlass – is targeting the growing tablet ecosystem.  Both companies are taking a more hands-on approach to the growing tablet ecosystem as they seek to more closely integrate their software strategy with a hardware component.  These moves are partly in the hopes that a hardware component will spur software demand and help buoy their entire platforms respectively.

Later today, Apple will report Q1 figures.  We know much has changed in the tablet market over the last three months.  Earlier this week, Pew Research Center’s Internet & American Life Project reported tablet and eReader ownership (unsurprisingly) surged during the 2011 holiday season.

This is consistent with what I expected (and subsequently reported) following Black Friday and the (unofficial) start of the holidays. Starting with Black Friday (but really through the entire holiday season) several things too place to help drive tablet sales.  First, prices came down significantly.  Prices for many of the “high-end” tablets were marked down significantly and lower priced tablets entered the market in calendar Q4.  A declining price helps up-take.  Secondly, both devices have been in the marketplace for 18+ months and are moving quickly into mass market appeal.  We are moving into the fat part of the adoption curve.  Finally, tablets were the loss-leader for many retailers on Black Friday.  While the volume wasn’t high on a single-store basis, in aggregate there were a plethora of tablets (from a variety of OEMs) bought during the weekend across a myriad of retailers from Best Buy to Big Lots to Radio Shack to Staples, to ToysRUs.  CEA estimates 14 percent of those who purchased tech over the weekend bought a tablet – up from six percent in 2010. eReaders also did well over the weekend with an estimated 15 percent of tech shoppers buying an eReader.  This figure is up from 13 percent in 2010 and two percent during the 2009 Black Friday weekend.

According to Pew, both tablets and eReaders are now owned by about roughly 1/5 of the US population.  More than a third of those living in households earning more than $75,000 (36%) now own a tablet computer and almost a third of those with college educations or higher (31%) own tablets.

Last week Kindle announced their move into the libraries.  You can read more here: (press release, NYTimes article, Kindle site on how it works).

There has been much talk in the past how Kindle, and eReaders generally, will play an influence role in education.  This move into libraries will serve as an important catalyst.  It will be years before eReaders become widely leveraged within library systems nationwide and years more before they become widely influential within public education nationwide but this marks an important first step (read the Economist’s recent Great Digital Expectations for a view on the current ebook landscape). While we are losing traditional book vendors, ebooks through libraries and hardware through other retailers will help drive adoption (RadioShack recently announced they would expand their eReader offerings).

Kindle books are now available at my local library and I’m testing the experience now.  Kindle is enabling me to retain any notes or highlights, but importantly Kindle will also retain this information. As I’ve discussed before, this strengthens Kindle’s approach to social.  More data creation will make a more valuable platform.  It may also help sell more eBooks though I think the jury is still out on this particular aspect.  If a user buys a book they borrowed from their local library, their notes and highlights will be updated in their purchased copy.

Many libraries are now working through the demand implications of a changing book environment.  Many are allocating more dollars to their ebook collections and updating the borrowing window.

 

 

 

 

The big news in tech today was of course Google’s acquisition of Motorola Mobility.  Google dipped into it’s roughly $39 billion in cash and agreed to pay $12.5 billion (or $40/share) – a 60+ percent premium over Friday’s close. You can read some of the coverage here: Google’s blog post on the acquisition, TechCrunch, TechCocktail, Forbes and TheVerge.

It is an interesting acquisition given Moto was already all-in on Android.  The implicit assumption is that Google can more effectively run what was already the equivalent of their mobile hardware business internally.   Initially I didn’t really see this as patent acquisition despite acquiring 17,000+ patents (and other 7K+ pending), but here is what Google wrote on their official blog:

We recently explained how companies including Microsoft and Apple are banding together in anti-competitive patent attacks on Android. The U.S. Department of Justice had to intervene in the results of one recent patent auction to “protect competition and innovation in the open source software community” and it is currently looking into the results of the Nortel auction. Our acquisition of Motorola will increase competition by strengthening Google’s patent portfolio, which will enable us to better protect Android from anti-competitive threats
from Microsoft, Apple and other companies.

TechCrunch quotes Citi analyst Mark Mahaney in calling the acquisition “defensive and here is what Android partners have to say about the acquisition.  TheVerge also wrote about Google’s newly acquired patent pool so clearly besting the competition through a large patent pool is an important dynamic to this acquisition.

Here are a few things that haven’t yet received much attention:

The acquisition gives Google tremendous distribution which is something Google has lacked.  As TechCrunch points out, once the acquisition clears, Google will instantaneously become the #2 Android hardware vendor. Distribution is one of the key elements
to hardware partnerships.  The new found distribution will help Google push out new devices without having to rely
solely on partners.  With this, I suspect Google will use this new hardware division (and accompanying distribution) to
make a big push into tablets – a market which Android hasn’t yet been extremely successful in penetrating.

Despite this new distribution, it sounds like Google will remain committed to their Nexus strategy for the foreseeable future . Given the acquisition and the need to placate their other hardware partners, I suspect the next Nexus device will not be a Moto device.

A final area where little has been said is the set-top box business of Motorola Mobility.  Last month Logitech (a key Google TV hardware partner) announced sales had been dismal. Logitech even announcing more boxes were being returned than sold (see here and here).  Logitech also subsequently dropped the price to $99 – more in-line with the “other” TV box out there.  The Moto
acquisition might allow Google to breathe new life into their TV ambitions.

Much of the chatter today went back and forth on whether this was a hardware transaction or a patent pool transaction.  What this discussion subtly misses is that platforms require a hardware core. This is something I’ve talked a lot about over the last year. The current platform discussion has focused on software (Android v. iOS v. Other), but this fails to see the role hardware plays in developing the ecosystem of a platform.  As you look through the history of platforms, hardware is at the core.  Through this acquisition, Google ensures the hardware core of Android is secure.

 

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.

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.

What happens when eReaders grow up to be tablets? This morphing is already well underway. Barnes & Noble has always referred to the Color Nook as a tablet eReader – with tablet being the operative word. At their event this week. B&N claimed the Color Nook is the top selling android tablet in the market. Amazon – the current king in e-ink eReaders – is getting set to launch potentially two new tablet-oriented devices.  E-ink is actively working to bring to market color e-ink screens and other eReader players are treading towards tablet-like devices.  But this evolution has important implications.

First, network economics for text are very different than they are for video and more data-intensive applications. One of Kindle’s opening hallmark features was the ability of the user to download books via the cellular connection without having to independently contract with the service provider.  In fact, at one point Amazon switched Kindle cellular service from Sprint to ATT and users never took notice.

This won’t be the case as users gain access to more data-intensive offerings. These services are more bandwidth intensive (and therefore costly) than delivering text over the network.  Even though our research has constantly shown most tablet users primarily connect via Wi-Fi, the existing service contracts can’t work when devices are more than books. This will be a key element in the new tablets being launched by Amazon.

App usage on apps-enabled devices will crowd out book usage.  This has ramifications for device pricing.  In the early days of Kindle, Amazon subsidized the content instead of the hardware. This changed as Apple moved into the book business and subsequently eReader OEMs began selling ebooks at the publisher price and subsidized the hardware prices (or atleast began selling them at very low margin).  If the margin is made on the ebooks and their are less ebooks sold as a result of changing use-case scenarios – OEMs will be in search of a new business model to driven margin.