Sunday, August 21, 2011

Lenovo Hasn't Read About iPods

Lenovo's chief executive Yang Yuanquing announced that it will dominate tablets in China because "Apple only covers the top tier." Lenovo, he says, will cover more price points, and reach Chinese customers that can't afford a $500 device.

Remember the Jaded Consumer prediction that Apple was underway with tablets on the same mission it undertook with iPods?

Rewind the clock a few years. Manufacturers of MP3 players were laughing that Apple only sold a $500 player, and that because they could use cheaper (bigger) drives or Flash that they could build things that would reach customers at other price points.

Today? Apple has for years covered every price point from $40 to the top of the market, and with such volume of production and such supply-chain management that nobody else can really make money in the game. No Flash? Now that Flash is big enough to support a player worth printing an Apple on it, Apple is the world's largest buyer of Flash. Trying to build a Flash player to make money in Apple's playground is a tough game.

Hell, Apple's in the process of doing the same things with cell phones, a market in which Apple takes in two thirds of all profit in the entire market. Competitors like Nokia? You can't make it up in volume when you sell at a loss, buddy.

So, what's the difference between tablets and cell phones?
  1. Cheap cell phones don't need a pricey touch screen. Any tablet must, to accommodate the expected UI, include a costly touch-sensitive full-color screen capable of displaying crisp text and viewable movies. This raises the floor on price, except to the extent competitors want to try selling unusably small tablets. Good luck making money in that market, Lenovo.
  2. Cheap cell phones don't need high-end graphics or the horsepower to run all the apps people expect from tablets. What makes tablets so useful are, unfortunately for Lenovo, the apps. That means that unlike phones, in which manufacturers can target customers who won't run apps with a machine whose processor can't run apps, tablet competitors have to ship hardware capable of putting images on the touch-sensitive screens and capable of interpreting touch controls while the apps are running without making the sound skip. These things either involve costly mobile graphics coprocessors, or high-end low-power mobile processors, or terrible battery life that will kill sales. This also puts a floor on parts costs. It also establishes a usability threshold below which the product will suck so badly no-one would want to tarnish their good name selling it. Again: good luck, competitors.
  3. Software. In the phone space, there are market segments in which software is unnoticeable to users. There is of course software on these low-end phones, but all users notice is that it either (a) is unnoticeable (a success) or (b) interferes with making calls (e.g., by introducing a half-second lag between every button-push and every response, so that you can't see the mis-dials caused by the software not picking up keystrokes on cheaply-built buttons, as I "enjoyed" with the phone I owned immediately prior to owning a 1st-gen iPhone). Considering how badly some well-known phone manufacturers are doing at delivering phones that just make calls without irritating users, the ability to deliver quality software and/or adequate hardware is something one can't really take for granted. And since software is a major part of the tablet universe, Apple's edge in software is an extremely serious advantage – especially in markets in which multilingual support is important, or malware makes Apple's curated platform and signed-app system more valuable. Lenovo is launching Android and MS-Windows tablets – both. Just how large are the resources Lenovi is able to put into making both those ecosystems as attractive as Apple's? (In fairness, Google and Microsoft have strong interests in building the value of each of their software platforms, but thus far the "on anybody's hardware" strategy targeted by each hasn't paid off. And in the case of Microsoft, the tablets had better be Intel-compatible unless running in a Microsoft demonstration... and what apps will be running on the non-Intel systems when support becomes official?) So, good luck on the software, which Lenovo won't control.
Given what Apple's achieved in the cell phone market without the above advantages – that is, taken over half the profit in the entire market – it's hard to credit Lenovo as a serious competitor to Apple in a market in which it competes with those advantages. Lenovo may sell units, but units aren't profit. Without profit, who wants to invest in effort to sell units at all?

The tablet market will be interesting for competition, but not for the reasons Lenovo's chief executive identifies. The interesting competition will occur not at the bottom end, but up where the products are highly desirable and capable of running exciting software. This is because the primary competition will ultimately be in software: the hardware will keep getting more affordable until, like the low-end iPod, it's pretty easy to afford. The software will be the primary differentiators, and the question will ultimately be whether the competitors will marry themselves to counterproductive ideas based on ideology, or will make strategically sound decisions that will result in high levels of perceived quality.

That's not where Lenovo is proposing to compete.

Lenovo explained that it had a phone where Apple competed at $500, but also had a $150 phone for lower-budget families, where Apple could not compete. However, Apple presently holds not only the #1 unit sales slot with its 4G iPhone, but also the #2 slot with its 3GS iPhone. The older model with already-paid-for design and manufacturing setup (and RAM limited to 8GB) helps protect Apple's position on at the top of the market by removing a safe place to compete at the tier just below it. (Much as lower-capacity music players protected Apple's top position in the music-player market.) Lenovo's $150 model hasn't apparently been able to out-compete either phone. Also: Apple's better-selling phone is the more-expensive one.

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