Thursday, October 8, 2009

Dell To Compete With Apple in Phones. Music Players, Anyone?

Commodity PC maker Dell, having failed in competition against Apple's music-player handsets, will now attempt to compete with Apple in cell phones. Although shuttering a North Carolina plant and firing 900 workers, Dell is reportedly gearing up to launch a new class of hardware next year for supply to AT&T, the service provider for iPhones in the United States.

AT&T's reason to do this is simple: Dell doesn't have AT&T over a barrel to kick in a stiff subsidy for the phones (AT&T's subsidy requires 17 months of customer contract payment to reach break-even), and the consumer demand for the phones doesn't give Dell Apple's leverage in dictating tough terms to AT&T. AT&T will thus presumably keep more service revenue from Dell handset customers. Dell is doing what commodity vendors do: compete on price (for a look at Dell's five-year and ten-year charts to see how Dell has fared as a commodity vendor, try Google Finance). Moreover, AT&T likely prefers to have an Android offering, which Sprint and Verizon either offer or will soon offer: if customers want Android-driven hardware, why shouldn't AT&T offer some?

Dell presumably likes Android because it is free from operating system licensing fees, which suck profit from its PC business. What Dell may fail to realize is that whereas lack of a licensing fee is a distinguishing feature for Apple in the PC business (allowing Apple to make more on a given piece of hardware than could Dell, because Dell like HP must pay Microsoft a licensing fee to install the operating system consumers still expect on their computers), everyone selling phones has already decided to stop paying third-party licensing fees. Palm has dumped WinMo for its homegrown Linux/WebKit combo it brands WebOS, for example. The largest WinMo vendor by unit volume, HTC, is launching Android hardware to stem declining profit. Nokia bought all the Symbian it didn't already control then licensed the OS royalty-free to its other users. RIM has its own OS, though it's apparently moving to WebKit for web rendering. Even laggards like Motorola who recently shipped sluggish WinMo-powered clunkers, are experimenting with Android going forward. What this means is that Android isn't a competitive advantage for Dell: everyone else has either Android (because it's free) or a home-grown alternative (because they believe it is better on their products), and nobody is stuck bearing licensing fees they don't want to pay. Dell is back in the same position it is in the PC business: competing on price to deliver hardware running the same kind of software available to everyone else.

AT&T can't lose, because AT&T can keep selling iPhones or Symbian-powered handsets or whatever else might be in demand by customers who are willing to buy AT&T's service. AT&T's money is made on service, not hardware, so the hardware is of interest only to the extent it prevents AT&T from making sales. Perferably, AT&T makes service sales to folks willing to accept low-cost hardware involving modest subsidies -- the very deal AT&T likely made with Dell.

Whether Dell's offering is an "iPhone killer" will depend on the quality of the software integration offered by Android with the rest of customers' electronic lives, but because anyone who wants can offer Android, will depend even more on Dell's ability to design and deliver reliable, exciting hardware offering real improvement in the way people organize their lives. Does this sound like Dell?

Dell's music player failed because it just wasn't exciting hardware, and because its content market wasn't as attractive as Apple's. What's different now?

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