Microsoft Tries to Derail the Barnes & Noble Juggernaut (!?)

Posted on March 24, 2011 by jyarmis

In the legal morass that is Android comes the latest news that Microsoft is suing Barnes & Noble, alleging patent infringement.  Think about the surface absurdity of that one.  Microsoft suing Barnes & Noble.  Even The Onion hasn’t contemplated this scenario.  So, what’s really going on here.

At a macro level, here’s what’s happening:

  • These kinds of patent lawsuits are so common that I’ve almost stopped looking at them altogether.  Usually it goes like this:
    • Someone sues someone else.
    • The someone else counter-sues.
    • The two companies exchange patent cross-licensing agreements, usually with one side or the other having to kick in some cash.
  • There’s a slight twist to the whole Android scenario, again though one that’s not uncommon.  Most of these patent lawsuits have focused on Android licensees and not the deep-pocketed Google.  It only makes sense to go after the weaker players, albeit ones with sufficient funds to pony up.

What are all these people suing in the Android space trying to accomplish?  It’s real simple.  If you’re trying to sell an operating system into a market where Google is giving it away, you need to make the OS appear not to be free.  In other words, you may not pay for the OS but by the time you factor in legal costs, your free OS all of a sudden isn’t so free.  Somewhere along the line, Google is probably going to have to ante up to help its partners by resolving all of these patent infringement issues.  It probably means Google’s going to have to write a check.  The good news:  they’ve got $34.9 billion in cash on hand and are printing more each quarter.  So much for the chilling effect on Android licensees.

What’s particularly interesting about the Microsoft/Barnes & Noble case is that presages interesting competition in the tablet marketplace.  Why should anyone be worried about Barnes & Noble or, by extension, Amazon?  The Barnes & Noble Nook e-reader actually runs on Android.  In effect, they’re selling a specialized Android tablet for $249.  How can they do that when the rest of the Android tablet marketplace is horribly overpriced as I’ve recently blogged?  Welcome to the new world of ecosystems and razors and razor blades.  Amazon and Barnes & Noble can sell these devices at low (or no) margin because the economics of incremental margin on the razor blades (books and other digital content) is so compelling and predictable that it pays to seed the market with devices.  That’s another reason why Apple, asides from supply chain efficiencies, can sell the iPad so competitively.  It can count on a reasonable income stream from the AppStore while in the Android space, those margins go to Google.

Yes, I know that the Nook and the Kindle are not general-purpose tablets.  Today.  But the color Nook is pretty darn close.  The Wall Street Journal’s Brett Arends even recently told readers how to turn their Nooks into tablets.  He overstated his case to make a point:  Barnes & Noble can do this easily and likely will.  If not, they deserve to follow Borders into bankruptcy.

Netting it out:

  • Google is likely to have to share some of its profits with its ecosystem to cover legal exposures.
  • Google is likely to have to share some of its app store revenues with partners.  Otherwise, the situation with competing app stores (already a fracturing standard) is going to get (much) worse rather than better.  They need to do this one quickly.
  • In other words, Android tablets need to get cheaper and Google will have to share its app and advertising revenues to make that happen.
  • Players like Barnes & Noble and Amazon can become strong players in the tablet marketplace because they have the economic model and ecosystem to compete with Apple.  Selling hardware alone is not much fun these days, and is only going to get worse.
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Facebook and Amazon Change the Streaming Video Marketplace

Posted on March 14, 2011 by jyarmis

The entries of Amazon and Facebook into the streaming video marketplace stand to change the economics and dynamics of watching video online.  While shortcomings and constraints will slow their impact in the near-term, make no mistake about it:  the economics and approaches have changed.

It’s easy to dismiss these solutions in the short-term.  No, Amazon doesn’t have the library of a Netflix.  No, the Facebook experience isn’t optimized for long-form video consumption.  If, however, you dismiss these two based on these shortcomings, you’re missing the point.

Let’s look at Amazon first.  For Amazon, this is a shrewd, and necessary move.  Amazon Prime, which offers free two-day shipping for all Amazon purchases for $79/year, is increasingly irrelevant as Amazon’s book sales move to digital.  By the middle of last year Kindle sales on Amazon surpassed hardcover books, by the four quarter that extended to paperback books as well, and on Christmas day Amazon sold more e-books than physical books combined (although that number may certainly have been skewed by the number of people opening Kindles as presents that day).  Thus, it is clear that Amazon had to do something to enhance the value of Prime for its most valued customers.  Of course, Amazon sells much more than books so Prime still has considerable appeal even for those who consume their books digitally.  Amazon wins either way.  If you get value because of the free shipping offer, the availability of streaming video for no extra cost is a compelling value-add.  And if you’re evaluating the competing streaming video options, Amazon is cheaper than Netflix ($100/year) and offers more than just streaming.  (Here’s an interesting analysis of the customer overlap between Netflix and Amazon.)  What’s most notable about Amazon’s offer:

  • It’s cheaper than the market leader, without any other considerations.
  • It’s bundled with other value, making it appear free to a significant range of customers.

Facebook’s entry is much more limited and complex but longer-term perhaps more impactful.  Much more limited.  A single movie at launch, The Dark Knight (incidentally, one of my 10 favorite movies of all time).  But this one is much more potentially transformational.  So what’s interesting about Facebook’s entry here?

  • While initially a standalone experience (and probably a sub-optimal one at that), given its market position I expect Facebook’s movie-viewing experience to rapidly evolve to a social experience.  From a marketing perspective, that talks to the viral potential.  More importantly, though, from a viewing experience, you could envision how Facebook could leverage its platform to increase the social elements in movie viewing in both synchronous and asynchronous fashions.  For instance, you might not only chat with other friends in real-time while you’re both watching a movie, you might also see the comments from other friends appear at the same point in the movie even if they’re not watching it at the same time.  Facebook can significantly shape the social movie viewing experience in a way that doesn’t exist today.  Twitter leads the real-time synchronous market today (e.g., we all Tweet during the Academy Awards) but the non-real-time and asynchronous markets are very much in play and Facebook can lead the way here.
  • The role of Facebook Credits in paying for movies is very interesting.  I have long been a believer of “count down” models vs. “count up.”  A count-up model is one where you pay for each purchase.  Every transaction counts up the amount of money you’re spending on the particular activity, and thus is an individual purchase decision.  In a count-down model,  you have a pool of credits you can “count down” against.  In your mind, the money is already spent and it’s just about how you’re going to spend the money.  With Facebook Credits, users will have a variety of ways to spend their currency (games, movies, other products and services) and a variety of ways to acquire it (you can even buy gift cards at Target).  This will make it easy to make an impulse buy of a movie (whereas Netflix and Amazon at their price points are considered purchases).

For different reasons, the entrance of Amazon and Facebook into the streaming video marketplace change the landscape.  The net result is that the marketplace has new competitive requirements.

  • Movie viewing alone may not be enough to sell a movie service.
  • The social experience of watching a movie online is in its infancy but is likely to change very quickly.
  • The payment models for video consumption are expanding, and will include:
    • Subscriptions
    • Virtual payments
    • Bundling with other services

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Apple: That Didn’t Take Long

Posted on February 17, 2011 by jyarmis

Two weeks ago, I blogged that Apple was picking fights (then Sony) that it had no business picking.  The latest go-round now is with big publishers over how to sell subscriptions on the iPad and iPhone.  Naturally, Apple wants to dictate terms and extract its 30%.  Whereas bullying the music industry was pretty easy and, one could argue, justified, with these content producers, its a tougher argument and a tougher settlement.

In music, you could credibly argue that Apple made the digital music industry.  Before Apple came along, things were fractured, to say the least.  Apple unified a market, created a great experience, strong-armed the labels…and deserves to share in the fruits of its success.  With books, newspapers and magazines, it’s a different case.

  1. These players had well-honed approaches and strategies before Apple came on the scene.
  2. These players are much better politically-connected than the music people who, ultimately, are small and don’t influence politicians very much.  Magazines and newspapers:  bigger and, oh yeah, that political clout.

Not surprisingly, therefore, the Justice Department and the FTC are said to be looking into Apple’s business practices.  Wow.  That didn’t take long.  Apple announces something on Tuesday, on Wednesday Google launches a competitive offering (taking only 10%) and on Thursday there are rumors of government involvement.  If that didn’t tell you Apple picked the wrong fight this time.

We’ve seen what government intervention did to IBM, AT&T and Microsoft over the years.  We’re seeing Google’s challenges now.  Welcome to the party, Apple.  I reiterate my position that two weeks ago could have been Apple’s zenith.

Filed under: Consumer Electronics | Tagged: , , , , | 2 Comments »