Microsoft Office: Better to Switch than Fight?

The Wall Street Journal notes that Microsoft hopes its Office suite will provide leverage to attract buyers to Windows tablets, but asks whether it would be better off providing Office for the iPad and Android tablets.

In making the decision, Microsoft has conflicting goals between the Windows and Office divisions — the two major pillars of the company’s cash flow. According to the WSJ, Windows provides "about a quarter of revenue and about a third of operating income. The MS division that includes Office has “30% of sales and nearly half of operating income.”

However, PC sales are falling precipitously, and with that, the profit stream from Microsoft’s share of the Wintel duoopoly. The fortunes of Office are heavily tied to those of Windows, but as the Journal notes, Microsoft now has an important choice to make.

One option is to continue to tie Office to Windows in hopes of establishing Microsoft’s platform in tablets. Tablets (not smartphones) are the apparent replacement for PCs, and Microsoft has only 7% share of Q1 global tablet sales, vs. 48% for the Apple and 43% for the Google platforms. If Microsoft doesn’t fight tooth-and-nail for tablet market share, it will be a much smaller and weaker company five years from now.

By way of analogy, a decade ago Microsoft was encouraged to offer Office for Linux, but never did. One concern was that providing Office would legitimate Linux; in this case, the rival tablets are already more legitimate that Microsoft’s offerings. As it turns out, I think MS made the correct decision then, because desktop Linux is a boomlet that never happened.

However, the general principle is correct. With the PC market in free fall, I believe Office needs to generate its own revenues, wherever it can find them, without regard to synergy. MS has enjoyed a high-margin business selling Macintosh business applications for 29 years, and the WSJ estimates that Office has a 30-40% share among Mac users. Similarly, Apple’s tablet buyers are an attractive growth market:

Analyst Brian Marshall of ISI Group expects Apple to sell 88 million of them this year. If 35% of those iPad buyers also purchased Office, and Microsoft received about $40 per copy of the software, that would translate to about $1.2 billion in additional sales. Add potential customers from the existing pool of iPad owners, plus all of those with Android tablets, and the figure could well be higher.

Otherwise, the Office group risks accelerating a more serious problem: the risk of irrelevance. My daughter’s (former) high school adopted OpenOffice as the standard tool for the entire school, and it worked well. The Achilles heel of OO is the imperfect compatibility with MSO, but if everyone’s using OpenOffice, it’s a non-issue. I wonder how many of those students will ever buy Microsoft Office later in life.

WSJ also notes Microsoft’s need to challenge its incipient cloud rivals:

an added benefit would be to nip in the bud those mobile rivals training a new generation of device users to rely on Office alternatives such as Google's Google Docs, applications from Evernote, and Apple's iWork apps.

In the Gates era, I don’t think such a strategy would be seriously considered, as Chairman Bill would doggedly (and optimistically) wait for Windows tablets to turn the corner — just as he’s waited more than a decade for Windows to become a viable smartphone platform.

I have no idea what Steve Ballmer will do, given he has escaped accountability for an abysmal record as CEO. But I know what he should do.

Disclosure: I own 100 shares of Microsoft, as part of a Dogs of the Dow dividend-seeking investment strategy. I own several Macs, but no Windows or iOS devices.

Amazon emulates deceptive airline pricing

Amazon introduced some new e-readers Wednesday that increasingly look like tablets. The color version, the Kindle Fire, looks a lot like the other 7" tablets out there — with Android and a (modified) WebKit browser. (And like Barnes & Noble, it’s a locked down Android rather than a real Android experience). Jeff Bezos even played the Steve Jobs role, albeit with a collared rather than mock-turtleneck shirt.

As befitting a commodity product category, what’s notable is the aggressive pricing, lower than any previous Amazon or Barnes & Noble product in these categories. The color tablet is hundreds lower than the 7" Android tablets, threatening the (already dubious) future of these products from RIM, Samsung and others.

The Kindle Fire is $199, challenging the existing (and largely unknown) 7" nookColor at $249 both on price and a wider range of content. B&N's Silicon Valley lab is working on a replacement, also due for the Christmas season.

However, for the rest of its products (the black & white e-ink models), Amazon has adopted deceptive pricing worthy of a major American airline, starting with the rollout photo taken by ZDNet:

and continuing with the pictures on the Amazon website:

The problem is, these are the product prices With Spam® — continuing the Orwellian name of “Special Offers”. The actual prices are $30-40 higher:

Product	Price	With Spam®
Kindle	$109	$79
Kindle Touch	$139	$99
Kindle Touch 3G	$189	$149

Perhaps Amazon truly hopes it will become an advertising-driven powerhouse to someday rival Google. My suspicion is that — like the airlines — this is just a form of bait-and-switch deceptive pricing that so far seems to be working.

How will countless Americans feel about getting a spam-infested e-reader under the Christmas tree this December, all because their loved one was too cheap to buy the real thing? Or will gift-givers be drawn in by the deceptive prices, and then spring for the real product? How much longer will the media enable this deception — describing the features of the spam-free products but touting the low prices of the spam infested versions?

After 30 years, is the IBM PC reign ending?

Cross-posted from the IT History Society blog.

Thirty years ago, the International Business Machines company introduced its first general-purpose personal computer, the 5150. (The IBM 5100 and DisplayWriter were also personal computing devices, but most people don’t count them as a first.)

Although I have written about August 1981, I would have forgotten about the anniversary except my friend Tom Pfaeffle linked a BBC article on his Facebook account. Most significantly, the article cited a blog posting by Mark Dean, an IBM executive who was there at the beginning:

It’s amazing to me to think that August 12 marks the 30th anniversary of the IBM Personal Computer. The announcement helped launch a phenomenon that changed the way we work, play and communicate. Little did we expect to create an industry that ultimately peaked at more than 300 million unit sales per year. I’m proud that I was one of a dozen IBM engineers who designed the first machine and was fortunate to have lead subsequent IBM PC designs through the 1980s.

What’s grabbing the attention is Dean’s claim that we’re already in the post-PC era:

It may be odd for me to say this, but I’m also proud IBM decided to leave the personal computer business in 2005, selling our PC division to Lenovo. While many in the tech industry questioned IBM’s decision to exit the business at the time, it’s now clear that our company was in the vanguard of the post-PC era.

I, personally, have moved beyond the PC as well. My primary computer now is a tablet. When I helped design the PC, I didn’t think I’d live long enough to witness its decline. But, while PCs will continue to be much-used devices, they’re no longer at the leading edge of computing. They’re going the way of the vacuum tube, typewriter, vinyl records, CRT and incandescent light bulbs.

The remainder of the posting goes on to discuss IBM’s success in the “post-PC era” and his own career trajectory from IBM Research to become CTO for IBM’s Middle East and Africa operations in Dubai.

I wonder if the claims of the post-PC era are a bit premature. I own a tablet too, but I’m writing this on a (Mac) personal computer because it has a bigger screen and a keyboard. It’s possible that we’re heading to the post-Windows, post-Mac era — one where the personal computers have a slightly different form factor but a new (smartphone or tablet) OS.

Still, as Tim Bresnahan and Shane Greenstein established in the late 20th century, computing platforms decline (or die) only when replaced another platform. So the idea that the PC will be replaced by something new is nothing new, but just another round of Schumpeterian revolution that claimed minicomputers and workstations — not to mention the mainframe businesses of the BUNCH.

The hubris of the little lie

I was driving to a conference Thursday when I heard a radio ad that proclaims YAAT (Yet Another Android Tablet), the Toshiba Thrive, as being the “most usable” tablet ever.

Meanwhile, for several months we have been hearing: “Amateur hour is over” and “Introducing the world’s first professional-grade tablet” from Research in Motion.

RIM shipped 500,000 units in its first fiscal quarter ending May 28. By comparison, Apple shipped 4.7 million iPad 2 models in the quarter ended March 26, which was a bad quarter for Apple.

So why is it that the makers of the 2nd tier tablets assume that customers will believe the inflated claims of their products? Didn’t anyone think such exaggerations would undercut what little credibility they had? Or are these coming from such overconfident companies that they don’t recognize a lie when they see it?

Goebbels used to brag about the effectiveness of the “Big Lie,” but that assumed that people didn’t have access to other forms of information. Somehow I don’t see that happening for 2nd tier tablet makers.

Photo (June 12, 2011): Research in Motion demonstration trailer is ignored at Del Mar Fairgrounds, despite being astride a major foot traffic corridor.

E-readers are not tablets—yet

This semester, three of my SJSU honors students studied the tablet and e-reader market. Swapnil Lall, Michael Edmonson and Joshua Hawley came up to speed on an emerging and turbulent market segment. Since their presentation last month, there have also been some important announcements in this market.

They did 20 interviews, 57 intercept surveys and 133 online surveys of owners and non-owners of these products.

Not surprisingly, they found that the iPad dominates mindshare as the iPhone did four years ago. Most respondents want an iPad, even if few are willing to pay the $500 price. As various analysts have noted, there is no tablet market — just an iPad market.

However, there is an e-reader market, and the separation of specialized e-readers from general-purpose tablets seems only temporary. Today there are significant differences in price and screen technology, but major overlaps in usage — as well as one product (the nookColor) that straddles both categories.

It is clear that the tablet market is growing, as awareness and usage grow. For owners, the products clearly compete with laptops, smartphones and physical books.

The most popular usage categories that our students found were (in order):

• news
• books
• social networks

Two-thirds of the respondents say that e-reading is a primary reason for using the device. The web is important, but for most e-mail is less important than people thought it would be. Having a web-connected tablet provides the value of serendipitous discovery, as when one respondent uses it with IMDB to research actors in the current TV movie.

For now, the market has two distinct segments: the $100-150 black & white (E-ink) e-reader without Internet capabilities, and the $200-800 color web tablet with WiFi and possibly 3G. Even if the two categories will eventually merge, the entry level devices are spurring adoption, attempting to lock-in e-book formats and hastening the demise of physical books.

NYT columnist David Pogue evaluated the new Nook (aka “Simple Touch Reader”) and Kobo (“eReader Touch”) in his Thursday column. He laments the current limitations, like the lame “lend” features (one time only) and restricted availability (no Harry Potter).

Still, these 6" touchscreen E-ink tablets improve on the market-leading Kindle in terms of convenience and size, with the Nook nosing out its rival:

The All-New model, for this nanosecond in marketing time, offers the best combination of size, shape, battery life and features on the market; it’s a superb reading machine. But remember that buying an e-reader means locking yourself into that company’s bookstore. Idiotic, incompatible copy-protection schemes mean that you can’t read a Kindle book on a Nook, or a Nook book on a Kobo, or a Sony book on an iPad.

With a 2-week battery and a size that fits in my back pants pocket (when standing), the new Nook seems close to my ideal.

Amazon will presumably introduce an improved B&W device in the next few months, and is expected to offer a color tablet in time for Christmas. While all the press has been focused on Android tablets, it appears that (outside the iPad) all the action has been on the low-end e-readers that are permeating the public consciousness and changing behaviors. If I were doing a startup now, I’d be interested in developing enterprise software (or cloud services) for high school and college students who will quickly abandon physical books for e-readers.

Meanwhile, there will be a bloodbath in the 7" and 10" tablet segments as company after company loses their shirt. I don’t know who will eventually be left standing, but it’s clear there’s a lot of money to be lost trying to peddle $500+ products to consumers who don’t really need them and would rather buy an iPad anyway.

One thing I haven’t seen mentioned is the gender effect for tablet size. At least in the US, most women carry a purse that could easily hold a 6" e-reader or 7" tablet, while for men, it’s either a pocket smartphone or a 9-13" tablet or laptop. Is the 6-7" device a “tween” device, or will it find a permanent home?

While I like the size (and price) of the new (6") Nook, compared to my 7" nookColor the screen seems a little small for reading PDFs of letter-sized documents — and I’m not going to carry two devices for PDFs and e-books. Still, a $150, 8 oz. e-reader that reads books and PDFs would find a place in my briefcase alongside my laptop, both to provide better battery life and also provide a second screen while writing reports or emails.

At long last, small NookColor improvement

Barnes & Noble released their NookColor 1.2 update on Monday, updating the 7" tablet to Froyo (Android 2.2) and providing a limited app store.

After playing with it for 24 hours, I can say there are two major pieces of good news. One is Flash: I tried it with Google Voice, and was able to listen to my voicemail messages. (Obviously I couldn’t make calls from my NookColor because it lacks a microphone).

The other is a decent email client. It auto-configured for my two Gmail accounts, and seems allow for arbitrary POP and IMAP servers. (One quibble: no "Reply-To" field, important in many organizations.)

A third small but useful change — the Quick Settings popup includes the screen brightness, something I asked for last December.

However, the long overdue app store is a bust. The contact application is still useless: as before, it only picks up email addresses from Gmail, not the phone number, street address, or any other contact information.

And there’s still no calendar app. The 7" screen of my NookColor is larger than my last physical organizer in the 1990s — it would be a great way to schedule and view meetings, again synchronized to Gmail, Exchange or whatever.

Android phones have a decent built-in calendar and a choice of dozens of calendar apps, but the NookColor still has no built-in calendar. The only one in the app store is the Fliq Calendar — criipleware for a paid side-loading application that doesn’t synchronize to the net — an odd choice for a device that’s always on Wi-Fi and rarely on USB.

And that’s the rub: there are only 139 (there were 140 Tuesday night) Nook Apps™ for the NookColor vs. an estimated 150,000 for Android overall. There are only 15 free apps, versus 100,000+ for the iPhone and tens of thousands for the iPad. A dollar for a clock app?

Maybe there’s just a lag in qualifying. B&N is soliciting new developers to join their “qualified” developer program, so perhaps in a few months we’ll have a broader range of applications.

For now, what we have is a tablet that is exactly what was released last November — plus the long-promised Flash.

Still, this is amazing: 15 years after Palm Pilot, we have a 7" PDA that has no calendar and no usable address book. What gives?

Nook needs that long overdue app store

Brett Arends wrote a glowing review Wednesday in the WSJ of his nookColor and why it’s a better bargain than the iPad 1 or iPad 2. The main difference between his experience and mine is that he hacked his to be a fully functioning Android tablet:

I downloaded a very simple, perfectly legal software fix from the Internet that turned it into a fully functioning tablet running on Google's Android platform. The fix, known as a "rooting," unlocks Barnes & Noble's proprietary overlay. The instructions came via Ars Technica, a reputable site devoted to technology, and were pretty easy to follow.

I wasn't really expecting it to work. I tried it as an experiment. But the results were remarkable.

The Nook Color, which was designed mainly for reading books and magazines, is about half the size of an iPad or a Xoom. It weighs about 30% less. It runs on WiFi, but not 3G. It has an absolutely superb screen. And, once you've unlocked the software, it runs many Android applications, from email to news readers TweetDeck to, yes, Angry Birds.

He argues that it should stop stalling on its plans to make available its own app store:

A company spokeswoman would only say yesterday that it is still "in the works."

Huh? Time is not this company's friend. It should be seizing the moment while it can. Barnes & Noble stock, which was north of $40 five years ago, closed Tuesday at $11.67, a 14-year low. Not even the travails of arch-rival Borders Group, which has filed for Chapter 11 bankruptcy protection and is closing many of its stores, is helping.

I also have long thought B&N could grab the low-end tablet market if it wanted to. In particular, the Kindle is a locked platform while (in principle) the Android-based nook and nookColor are an open one, available for third party development.

The problem is that B&N, like Amazon, wants to make its money from content. Having people pay $250 or $200 for the tablet and never buying a book or magazine is exactly like hackers buying an Xbox or Xbox 360 and converting it to a Linux box without ever buying a game.

But B&N has a pretty clear choice: either get people to carry around its tablet, or proliferate its reader app and forget about selling tablets. I am much less enthusiastic about the nookColor than when I bought it, because without the basic apps that you would find in a 1995 Palm Pilot — like a synchronized address book, a calendar and a simple note-taking app — I still have to carry a laptop or smartphone to every place that I take my nook. (Or I can just carry the laptop and leave the nook at home).

My guess is that by 2015 both B&N and Amazon will be out of the tablet business, or at best will be private labeling someone else’s high volume tablet (like HTC or Samsung) the way Sears does for washers or refrigerators. So the next 2-3 years could be used to build loyalty to BN.com e-downloads (assuming it fixes its store) and perhaps further leverage the brick & mortar stores for supporting electronic content platforms.

Update Thursday 8:30am:
Arends was interviewed on the WSJ “Digits” video blog, reiterating the points of his column. Two points I’d argue with.

First, while he praised the screen as being better than other low-end tablets, he (or his host) concluded it wasn’t suitable for watching “Digits” on. In fact, that’s how I watched the interview: the nookColor does a great job of showing the video, even without Flash. However, the nookColor (or the WSJ web page) take over the screen and there’s no way to navigate back to the original page or to the next video. (I’m surprised he would say anything about this without trying it first.)

Second, while I long agreed with his general point about commodity tablets, he clearly underestimated the B&N achievement: 

Barnes and Noble is hardly a cutting edge technology firm. They have managed to come out with a pretty good Android tablet — from a standing start, I think within a year they set up the whole nook thing. If they can do it, anybody can.

This is like saying that because Google has created a mobile phone OS that competes with Apple, anyone can. That’s certainly not true: so far Nokia, RIM and the Koreans have failed, and it remains to be seen whether Microsoft will either.

B&N put together a crack team of Silicon Valley veterans in Palo Alto to make an easy-to-use mobile device. I don’t see the Asian commodity producers doing this, which means that (as with many other products over the last 40 years) most will have solid inexpensive hardware and incomprehensibly bad software. I think people will be much more tolerant of incoherent software in their TV or DVD player than in a handheld computer.

Barns & Noble: searching for an answer

The year 2011 should be a good one for Barnes & Noble. As Best Buy was with Circuit City, B&N should be the primary beneficiary of the Borders bankruptcy and closure of another 200 Borders stores.

It also has a promising tablet computer in the nookColor, which is being developed by a team of Silicon Valley veterans in its Palo Alto R&D facility. It is distributing and supporting the devices in its 700 physical stores, including free Wi-Fi and free book browsing for nook owners.

It’s also leveraging Amazon’s sales tax disputes with the states to attract potential marketing partners. States can’t legally tax out-of-state sales under Quill v. North Dakota unless there’s a physical presence. If the states want to argue that website affiliates are a physical preference that makes it liable for tax — a point Amazon disputes — then Amazon will shed those affiliates. Since it’s already stuck paying California taxes, B&N is now soliciting those soon-to-be-former Amazon affiliates to promote its own site.

For many years, B&N was a successful fast follower in its rivalry with Amazon. When I taught my first MBA course in 1998, I wrote a BN.com caselet to show how Barnes & Noble moved aggressively to respond to the Amazon threat with a “clicks and mortar” (aka “bricks & clicks”) strategy. That strategy held up pretty well for a decade, except that it found its physical stores made it futile to fight state sales tax levies, leaving it at a cost disadvantage in high tax states..

When it comes to e-books, Barnes & Noble seems to have tried its best to match Amazon’s Kindle AZW content with its own supply of (proprietary DRM) epub files. In a spot check, both had Michael Porter’s two most popular strategy books at the same price, while neither store had anything by J.K. Rowling — a search for “Harry Potter” instead produced books about Rowling and her billion-dollar manchild (68 on the B&N site).

However, the search algorithms for finding the B&N content seem primitive, particularly when on B&N’s own tablet — where navigation is inherently slower and more frustrating than on a keyboard-equipped laptop. I noticed the problems Thursday after I took my nookColor to my local B&N store.

Nook owners can browse books inside the shopping app, or use a web browser like everyone else. When you go to the BN.com website on a nook, it has the same tiny text hyperlinks that work great on a PC and terribly on a 7" tablet. One would presume that the website would know that a nook version of the WebKit browser suggests interest in nook content.

But the worst thing is the search algorithm. In some ways, it’s a prisoner of a literalism stuck in the 1990s. Unlike on Amazon, at the BN website and the nook shopping app when I searched for “Don Rumsfeld,” it found nothing. If I put “Donald Rumsfeld” into either one, it found the New York Times bestseller. (Amazon and of course Google will even suggest the correct option if I type “Donalf Rumsfeld”).

Conversely, the search options within the nook shopping application are nearly useless for popular topics. Like Amazon, BN.com has an “advanced” search option for specific fields, but on the nook app there’s just one free-form text search field, and no “advanced” option. So if I’m only interested in books with “Harry Potter” in the title and “Rowling” in the author field, the nook shopping app won’t let you do that.

Let’s take a more ambiguous case: the word “Bible” brings up 259,000 entries under “books” at Amazon.com, 79,000 books at BN.com and 10,000 in the nook shopping app. Entering "Bible" and “New International Version” produces 2,000 hits on BN.com and 118 in the nook app. In the former case, all of the first 100 hits are NIV Bibles, but only one of the top 10 hits in the nook store is correct — the other 9 have nothing to do with the NIV.

It’s hard to imagine a more strategic priority for B&N than making it easy for customers to find and buy books. Thus, it’s long past time for B&N to update its search and discovery algorithms. Ask.com, Bing, Excite, Google, Yahoo and even Baidu know who Don Rumsfeld is, evne if BN.com does not. Perhaps if it searches hard enough, Barnes & Noble can find a way to leverage external technology (we call it “open innovation”) to catch up to its #1 rival.

iPad: price is no object

Steve Jobs returned to work briefly on Wednesday to introduce the iPad 2. Clearly launching new platforms and changing the industry is his passion.

The introduction was and was not what everyone expected. It’s still a 10" tablet, but adds two cameras, a new operating system and much faster processor into a smaller and lighter box.

What didn’t change (despite various predictions) was the price. For example in March 2010 ZDNet flatly predicted “You know Apple will drop prices with the second generation iPad.” The price cut predictions continued up until Steve Jobs walked on stage — but the only price cuts were the clearance prices on last year’s model.

Instead, Apple is counting on superior execution to hold continued loyalty of the press and the customers. It’s also available next week in the US and two weeks later in major overseas markets, closing the window rivals had hoped to exploit: Apple will ship its second tablet before HP (and especially RIM) can ship their first.

The analysts who underestimated the iPad in 2010 are outdoing themselves to be bullish in 2011. Forbes quoted one prediction of 26 million units in 2011 — nearly double the 14.8 million sold in 2010. Again this year, Apple will remain the leader of the tablet market, with the #1 product, the #1 company market share and the #1 platform market share. Keeping 2/3 of the market in 2011 might be an underestimate.

In contrast, this year’s round of iPhones are rumored to include a lower cost model. Of course, this is year 5 for the iPhone and year 2 for its iOS cousin. Apple has both more serious competition and a more saturated high-end market in phones than in tablets.

However, indications are also that by setting the bar so high, Apple is making it difficult for competitors to undercut it on price. Its $500 iPad 2 competes with a $800 Motorola Xoom, which despite Motorola’s decades of high-volume mobile device experience, has a bill of materials cost higher than the original iPad. Steve Jobs showed a slide Wednesday noting the higher prices of its Motorola rival.

Apple also spent $3.9b of its excess cash to invest in its display suppliers, both enabling capacity expansion and locking up scarce inputs that are now unavailable to rivals. For now, most of its rivals (vertically integrated Samsung excepted) will have difficulty matching its volumes and prices of screens.

As Matt Asay noted last month, Apple’s rivals have no hope in the near term of taking away customers from Apple at the high end, among discerning early adopters:

No one beats Apple at being Apple. The best bet for the iPad also-rans, then, is to run a different race, aiming for mass market appeal….with much lower price tags.

For now, the only opening for its rivals is in the 7" tablet, which for now Apple has lambasted as a losing form factor. I disagree, and if I were a company like HP/Palm, I’d put all my resources in 2011 into becoming the #1 vendor of 7" tablets, and hope Barnes & Noble doesn’t get their act together quickly enough to own that market.

Now above $350, Apple shares were trading at $150 a year ago and $85 two years ago. Boy I wish I’d bought some: my 401(k) might actually be something I could use for retiring.

Update 3:30pm: Goldman Sachs reiterated a “buy” rating and set an AAPL target price of $450 — reiterating the pre-announcement prediction.

Google vs. Apple distribution price war

The first year of the tablet wars went entirely to Apple. Apple has the market share, installed base, the mindshare and the superior product. Most projections have Apple crushing the competition again this year, albeit by a lesser margin.

However, Apple needs to take seriously Google’s latest salvo in the tablet content distribution fight. If Apple hopes to keep the iPad the dominant tablet — in a way the iPhone and Macintosh never were and never could be — it needs to take this attack seriously.

Apple won many fans among software developers for its convenient app store in exchange for a 30% commission. But its proposal to extend commission to newspaper, magazine and all other subscriptions has been highly unpopular, and some have questioned whether this is really tenable in the long haul.

Then on Wednesday, Google said it would only take a 10% cut for its One Pass content store, a direct attack on Apple’s pricing model. (Isn’t competition great?) Although online distribution is a low value-added commodity — with oliogopolistic competition — I think Google can hold a 10% margin, because both Apple nor Amazon tend to prefer margins better than that.

If most of the online tablet media goes through such services, then Apple can make plenty of money on a 10% margin. The problem is protecting its margin for other App Store products. Already, publishers and developers have been trying to bypass paying Apple — using Apple to distribute free apps and trying to charge outside the app. Apple closing the loophole is fair — it deserves some compensation for its distribution — but its plan to keep 30% is not.

So will apps be 30% and content be 10%? Will everything be something in between? Will Apple be in denial about the price war until its share drops below 50%?

Apple already seems to have lost the book distribution fight. iBooks was stillborn, and I can’t see how it will ever catch Barnes & Noble, let alone Amazon or Google. Are magazines and newspapers the same distribution channel as books? I don’t think anyone can say for sure.

Apple was reasonably aggressive in responding to Amazon’s efforts to abolish DRM on music downloads, so I expect we’ll see their answer on or before the rollout of the iPhone 5 this summer. Will they protect their margins on the assumption they can hold the market another year, or will they respond aggressively to protect every bit of market share? That I can’t predict.

2010: officially year of the iPad

The first earnings call since Steve Jobs went on medical leave showed spectacular results.

iPad sales totaled 7.33 million in the latest quarter, in addition to 7.46 million in the preceding two quarters. The total is 14.79 million of (according to IDC) 17 million tablets sold in 2010 — 87% of the worldwide market. IDC projects 2011 sales at 44.6 million (not 44.5 or 44.7!), and my SWAG is that (assuming realistic product proliferation) Apple will account for 30 million of those.

The iPad in 3 quarters outsold the 10.8 million 2010 sales estimated by IDC for all ereaders, and the 14.7 million projected for 2011. The iPad has a unit sales volume 3.3x that of the Amazon Kindle (perhaps 4.5m in 2010) and has an ASP of 3x as much.

If the tablet market does grow to 45 million in 2011, then ereaders will be consigned to a relatively small role in mobile device, as tablets are increasingly used for reading magazines and perhaps even for reading books. The black & white E Ink is a transition technology, to be replaced by the color E Ink, Qualcomm’s Mirasol, or other technologies.

So 2011 seems like a good time for techies to buy a cheap web-enabled tablet to understand the form factor, its use case and limitations. It will also mean that the countless Android vendors fighting for #2 need to consolidate their gains.

Samsung sees itself the favorite, and as their cellphone growth threatens #1 Nokia, they would be risky to bet against. I think B&N (with their nookColor) has the enviable position in the US, but they need to license or distribute the technology worldwide to gain scale economies.

Delusional tablet proliferation

As part of the Year of the Tablet at the Tablet Electronics Show (TES) in Las Vegas this week, the chairman of AsusTek has unveiled a family of Eee Pad tablets (based on Android), hoping to leverage the brand recognition from its Eee PC family of netbooks.

According to the AP, the products were introduced by AsusTek chairmain Jonney Shih. The two main models are tablets that run Android 3.0 (aka Honeycomb):

• Transformer, 10.1" screen for $500-700
• Slider: 7" screen for $400-700.

In other words, they take a netbook, delete the keyboard and OS royalty, and double the price. I don't get it. Do they now see themselves as a technology or marketing powerhouse (apparently a common delusion among Taiwanese commodity producers.)

Suppose I wanted a 10" tablet. What other options might I consider? How about one with the most apps, the best PC integration, best browser, best dealer network and the best brand? So what kind of premium would I pay for an iPad? Perhaps none, since the iPad start at $500 — same as the Asus Transformer.

Perhaps I find that too expensive, and instead choose the 7" Asus Slider at only $400. Of course, there’s a NookColor (Android tablet) at $250 with a vertically integrated nationwide dealer network and a dedicated content store.

If this is the pricing of the promised wave of Android tablets, no wonder analysts predict Apple will retain 2/3 of the market.

Tablets succeed across the board

Everyone has remarked on the success of the iPad. Now we have (slightly credible) evidence of other product success, and with that optimistic predictions for 2011.

By all accounts, the iPad was a strong seller this Christmas season, but the official results won’t be available until Jan 18, when Apple releases earnings and sales for the quarter ended Dec. 26.

However, intrepid Fortune columnist Philip Elmer-DeWitt contacted 27 analysts for their estimated sales for this quarter, and got estimates ranging from 5.0 million to 7.5 million iPads sold. (The mean was 6.35 million). That’s on top of 7.5 million sold in the first two quarters (4.2 million of that in the quarter ending Sept. 25).

So Apple has sold at least 12.5 million of its $500-800 iPad, and maybe as many as 14 million. Meanwhile, Apple is preparing to announced the iPad 2 (although predictions vary wildly as to what that is.)

Apple is not the only game in town, but it’s still the market leader. According to Forbes, analyst Craig Ellis notes that with 69+ tablets for sale, Asian suppliers expect 40-60 million tablets sold 2011. He predicts 53.6 million (not 53.7?) sold, and 36.1 million (67.35%) of those to be iPads.

Update 3pm: Similar figures come from analyst Robert Cihra (via John Paczkowski): 54 million tablets in 2011, 36 million (67%) from Apple — up from 14 million in 2010.

Craig’s guessestimate on e-readers is 20 million in 2011, up from “around” 10 million this year. Forester puts the numbers at 11 million and 6.6 million respectively (but those might be US-only).

Such estimates are impossible to check since the category king, Amazon, is evasive and non-transparent when bragging about Kindle sales. Sure enough, this week, both Amazon and Barnes & Noble this week issued meaningless press releases that say their Kindle 3 and nookColor are its best-sellers ever.

A Bloomberg report claims internal leaks from Amazon place 2011 estimates at 8 million sold, vs. 2.4 million in 2010; most of the former are presumably the $139 Kindle 3 Wi-Fi. Analysts believe B&N sold about 2 million Nooks — most of those nookColor and most in the past 6 weeks.

One difficulty in comparing tablets to e-readers is that the Amazon and certainly the B&N sales are primarily in the US, while tablets are a worldwide phenomenon. Samsung’s hoping to sell 9 million tablets in 2011, and from its tepid US results, most of those are likely to be outside the US.

So by the numbers, it appears that 2011 will be the year of the tablet. Next week’s CES in Las Vegas will bring a flurry of Android tablets, as well as Microsoft’s latest effort to compete in the category.

Still, so far everyone expects the tablet category to remain dominated by Apple in 2011, even if its market share slips in the face of product proliferation by its rivals. Using Craig’s estimates, Apple still retains 2/3 of the combined tablet & ereader category, while Amazon would be limited to about 20% at a much lower price point. (The What-me-worry? folks at Amazon also noted that many iPad owners are also buying the Kindle.)

I predict Amazon will introduce black & white Kindle this summer at the magical $99 price point, but will it be enough? More importantly, will people continue to buy into its proprietary media format? Or will the entry of the Google eBook store — with files that can be read on everything but a Kindle — finally start to nudge the industry towards a more open format?

Personally, the most interesting question is leadership of the non-Apple tablet market. Perhaps the HP webOS tablet will catch on, but most likely the leader will be an Android tablet, such as the one I own — the nookColor.

The nookColor has already been hacked to run Android apps, including (as long predicted) even Amazon’s Kindle reader for Amazon. B&N promises to introduce its own Android download shop in Q1, presumably excluding Amazon products from the subset of apps provided. At its aggressive $250 price point, it seems to be the early leader among 7" Android tablets — at least in the US market.

NookColor: 28 days later

I’ve now had the nookColor for four weeks, enough to draw observations about the product and tablets more generally.

It’s been a long time since I had a 1.0 of anything: it’s both exciting and frustrating. I’m hoping that Barnes & Noble (like Apple and others) will have a generous software upgrade policy — beyond the subset of the Android Market promised for Q1 next year.

I carry the nookColor to work, to home, to Starbucks, to the airport, on several airplanes. I’ve used it for wardriving (well warwalking) down a city street with more than a dozen hotspots. I’ve loaded PDFs and RTFs and DOCs, bought a magazine and tried to buy a book (but it wouldn’t let me).

The use cases I’ve found so far:

• paid media (for me, more likely magazines than books)
• PDFs (which for a college professor is the format for professional journal articles)
• web-surfing at home (the WiFi at work is too user-hostile)
• (someday) viewing/listening to online media.

I haven’t resolved the issue of when to carry it and when to leave it home. However, for use in a hotel room, I find it makes a great second screen (for a web page or PDF) when writing something on my laptop.

I believe I’ll own a tablet for the next few years (until tablets merge with laptops or smartphones or both.) There’s no way I’d ever buy a single-purpose device like the Kindle, no matter how cheap. And unless Apple ships a $300 7" iPad next month, I’ll not have any regrets about my purchase, despite some significant problems. (B&N promised money back until Jan. 31, but my wife or tween will grab it if I give it up.)

The hardware is pretty good: yes battery and weight could be better but I suspect they’re close to the state of the art. (And being priced half that of the 7" Samsung Galaxy, I’m gonna be realistic). The hardware gripes:

• Lack of a hardware brightness control (I use the hardware volume control about 2x/month vs. 2x/day for brightness)
• A case better designed to use as a (landscape) easel for watching video
• The @*!#%& charger: a nonstandard cable and a non-standard (1.9amp) brick (try carrying a single brick for all USB devices; try grabbing a spare microUSB cable when you left your charging/upload cable at home).
• Nonstandard microSD cards: my Class 4 microSD card doesn’t work and tech support was useless; the manual is ambiguous but implies the nookColor requires a Class 6 microSD, but I can’t find anyone who sells them.

A hardware related issue is that (due to the power plug) the NC can’t be used in portrait (vertical) mode when plugged in — until the software people decide to allow 180° rotation.

The frustration comes from the software. This is a portable tablet computer, implemented as a hodgepodge of apps cobbled together to ship in time for Christmas.

Several basic functions are different depending on where you are: paid book, paid magazine, your own PDF, a .RTF file or a web page. The device (not applications) need a consistent and standard interface for:

• zoom in/out, and auto-zoom to width (set for HTML but not PDF)
• brightness control
• browsing/page turning in a hundred or thousand page document (except HTML)
• finding specific text

Some things are just sloppy implementations: if you zoom magazine pages, you have to re-zoom on the next page.

Someday it will be a good media device. With WiFi and a good UI, it would be great for podcasts — except that today it only streams .MP3 files and not .PLS files (a simple 10-line text file with embedded URLs). Once I thought I got it to play YouTube videos, but today the YouTube preflight proves that it fails both the MP4 and H.263 tests. (sigh).

The tablet desperately needs apps for email, calendar, address book (editable) and Twitter. The AJAX-based UI of Google Maps fails miserably, because it’s never clear whether the zooming/scrolling is for the NC or for the app. (The iPad solves this with a dedicated app, something the nookColor badly needs.) My luck entering text into Facebook has been similarly spotty.

I’m guessing most of these are known problems. Certainly getting YouTube working and some of the zooming quirks are going to be high on any gripe list. (If you call 1-800-THE-BOOK, nookColor is the first tech support option offered).

And then there’s that tech support: inexperienced and not very good. I was unable to buy any books, or even browse books free in the B&N store. I finally got through to tech support (dialin hours are biased towards East Coast customers). After being told that the way to fix the problem was to reset my computer — wiping out all settings, preferences, bookmarks and documents — I had to point out to tech support that the problem was probably that I had no valid credit card on file at BN.com. (Sure ’nuff, that was it.)

Finally, there’s that business model issue. Apple thinks it’s selling me a general purpose hardware device for me to use as I see fit, while Amazon wants to pay me to take its e-reader in hopes that I’ll be locked to its file format in perpetuity. B&N is trying to appeal to the Apple market, but its TV ads emphasize the color Kindle angle, hoping to get me to buy hundreds of dollars of locked content. (Ain’t gonna happen.) Meanwhile, Samsung TV ads promote the Galaxy as a ubiquitous 7" Internet tablet — without the content cross-subsidy and without the reasonable price.

As the first one on my block, in my building, on my train/plane to own a 7" color tablet, I get a lot of envious stares. People look closer and realize it’s not an iPad, but are intrigued by the smaller size (and even more by the smaller price).

Still, it’s at the bleeding edge of technology — even before the early adopters. Things may get better with the app store, the claimed update to Android 2.2 (or, better yet, 2.3) and an improved browser. In the meantime, it’s an interesting way to avoid doing my real job.

Tablet Wars (3): Is Wi-Fi enough?

Despite doing research on 3G cellular service for the past five years, I’ve thus far held off on buying any 3G service (or a smartphone that requires 3G service). The use case really isn’t there: I spend almost my time at work or at home, both locations with good Wi-Fi. Throw in free Wi-Fi at friends, Starbucks and many bakeries, and there isn’t much time in any day when I’m not being irradiated with 2.4 GHz radio waves.

So do tablets need 3G? Apple has both WiFi and 3G+WiFi models, Amazon sells Kindle models with 3G (but only for books, not for free content), while Barnes & Noble eschewed a 3G model with its nookColor. Fresh off its initial iPad partnership with Verizon Wireless, Apple is rumored to be preparing a dual GSM/CDMA 3G iPad 2 for launch next year.

These sort of 3G-enabled devices have provided business for chipmakers for the past few years — and in particular, the dual-mode device is the bread & butter for the growth of Qualcomm’s chip division. Meanwhile, Verizon, AT&T and the smaller carriers hope to use these additional 3G devices to sell more 3G data plans — while at the same time hoping these plans won’t get used, or that users will offload into local WiFi hotspots.

So do tablets and netbooks and notebooks need their own data plans? Or conversely, how/why will user buy 3G data plans (or real 4G as it becomes available)?

One path is the one the industry has been on the last few years: more smartphones, bigger screens, more computer-like features. I think that’s great for certain apps — notably traffic maps — but not for editing a spreadsheet on Google Docs.

The network operators’ preferred option is to have cellphone users buy a second 3G plan for their laptop or whatever. So instead of having one data plan, you have two. Not a bad option if you have an expense account, but do you get 3 data plans if you have a cellphone, laptop and tablet?

A third option is the Wi-Fi hotspot — like the MiFi cards Verizon is bundling with the Wi-Fi iPad to pretend (for now) it’s a CDMA iPad. It’s a great option for a college student or young adult (since anyone under 26 is still a child) to have wireless data available for all his/her personal devices at all time.

The future I’d prefer to see — although the jury’s clearly still out — is widespread availability of tethering, as was introduced by the Palm Pre, now available on the Droid X and other Android phones, and technically feasible on the iPhone even if AT&T (or Apple) tries to block it..

A shift to tethering would have two major benefits for mobile phone consumers. First, cellphones could go back to being cellphones. Rather than creating ever larger (but still inferior) imitations of a PC, cellphone makers could focus on making small pocketable devices that make phone calls, send text messages and can be used for light internet browsing.

Secondly, the use of Wi-Fi for tethering a laptop of tablet would decouple these products from the carrier subsidies and contracts — allowing users to replace them as needed, and keep their computer when switching their phone between carriers.

It seems like we keep coming back over and over again to the same issue between 20th and 21st century telecommunications. Back in the 20th century, you had one (or maybe two) wireline phone, one cable TV account, one Internet connection. In the 21st century, the network operators are hoping that you’ll keep adding new service plans every time you buy a device.

Am I going to use twice as much data if I own an iPhone and an iPad? Of course not. Does AT&T have the chutzpah to increase my DSL (or U-verse) bill if I add another PC or PDA at home? Of course not.

So until we get back to the per-household (or forward to the per-gigabyte) pricing, the idea of buying a new account is going to deter 3G adoption for tablets or laptops, except for that small niche of relatively price-insensitive businesses or consumers.

Meanwhile, Wi-Fi as a substitute for 3G still needs considerable improvement. Walking across campus with an (unactivated) Palm Pre acting as a Wi-Fi PDA, it was clear that our network and access policies were not designed for smooth handover from hotspot to another. Plus tablets and other devices need to bring back that great 1990s Internet innovation: offline browsing. (Hint: ignore the META REFRESH tag if there’s no network connection.)

Tablet Wars (2): half a tablet can be better than one

At the October earnings call, Steve Jobs both defended the long-term future of tablets and attacked the 7" form factor. While I agreed with him on the former, after five days with a 7" tablet, I’m convinced he’s wrong on the latter.

In fact, I believe that Apple will miss the boat if it dogmatically holds out against the in-between file format — the way it missed the 1990s PDA boomlet by sticking to the overweight, oversized and overpriced Newton.

In October, Jobs directed 4 criticisms at the avalanche of tablets expected this year. Two were at the 7" form factor. Here are excerpts from the Seeking Alpha transcript:

Second … a seven-inch screen is only 45% as large as iPad's 10-inch screen. … Well, one could increase the resolution of the display to make up for some of the difference. It is meaningless, unless your tablet also includes sandpaper, so that the user can sand down their fingers to around one quarter of the present size. … There are clear limits of how close you can physically place elements on a touch screen before users cannot reliably tap, flick or pinch them.
…
Third, every tablet user is also a smartphone user. No tablet can compete with the mobility of a smartphone, its ease of fitting into your pocket or purse, its unobtrusiveness when used in a crowd. Given that all tablet users will already have a smartphone in their pockets, giving up precious display area to fit a tablet in our pockets is clearly the wrong tradeoff. The seven-inch tablets are tweeners, too big to compete with a smartphone and too small to compete with an iPad.

Meanwhile, for the past three years Jeff Bezos has been selling millions of specialized 7" black & white tablets (which he calls “Kindle”), while Barnes & Noble, Samsung and various others will sell than more than a million 7" color Android tablets in Q4 2010. (Samsung already sold about 600,000 in its first month.) In the Black Friday newspaper ads, I counted nine different tweener tablets or e-readers — excluding the Kindle and nookColor — and the Galaxy was mentioned more often than the iPad.

The iPad has a screen that rivals the resolution of small laptop (or a netbook) with its 9.7" LCD, while the B&N nookColor and the Samsung Galaxy offer a screen in a 7" form factor. The smaller size brings a smaller weight and price: the nookColor is half the price of the WiFi-only iPad while the 3G Samsung is essentially the same price as the 3G iPad (but with a camera).

Steve Jobs posits a chasm between the smartphone and laptop/tablet form factors, and that his two extremes are the only ones that are viable:

Model	Screen	Resolution	WiFi Price	3G Price
Apple iPod Touch	3.5"	640x960	$229
Amazon Kindle	6.0"	600x800	$139	$189
B&N nookColor	7.0"	600x1024	$249
Samsung Galaxy Tab	7.0"	600x1024		$600
Apple iPad	9.7"	768x1024	$499	$629

However, a 7" tablet can be held with one hand, walking around and is roughly the dimensions of a paperback book. It works pretty well for reading most web pages and certainly for watching a 480x360 YouTube video.

After trying to read web pages on an iPhone and a Palm Pre, I can’t ever see using one again for anything other than an emergency. Dunno, maybe it’s being farsighted (+1.5 correction for reading) and this is not an issue for their core teen market.

Now Steve sells laptops with screen ranging from a 11.6" to 17" diagonal size and prices from $1000 to $2300. In marketingspeak, that’s segmentation — trying to avoid leaving any needs unmet.

I’m guessing that Steve’s would be that laptops are different: it’s possible to provide pointing and data entry for all these sizes for a laptop but not for a tablet. Since the 7" virtual keyboard is clearly superior to the 3.5" iTouch/iPhone keyboard, the barrier is the pointing experience.

There is a very real difficulty of hitting tiny hyperlinks in 8 point font with a fingertip. My tween (with much smaller fingers) complained about it tonight with my nookColor, and it’s been an ongoing frustration since I brought the mini-tablet home.

However, if Steve doesn’t sell a 7" tablet, many other people will — most of them undercutting the iTab’s price point. Maybe they won’t have 100,000 apps but there will be thousands of Android apps — including apps from the major media companies (Facebook, NYT, Time etc.) that will probably be just as good in the 7" size as in the 9.7" size. And a $200 color tablet will reach a lot more people as an impulse buy than a $400 one.

One of Steve’s other comments was about the usability of the products based on Android 2.1 or 2.1 and it appears he was right. More later.

Tablet Wars (1): media and media formats

Over the weekend, I became the first kid on my block (and in my office) to own a nookColor. Even a few days have helped me understand and appreciate the form factor and its future; this is the first of several postings on the future of tablets.

I’m a true believer, and I think Apple has it almost right. For that matter, two decades ago John Sculley almost had it right. The tablet is not a computer for typing, it’s a media device for consuming three things:

• websites and the limitless free content of the WWW
• professional, paid media — replacing the dead tree versions of books, magazines and newspapers
• video

At a reasonable size, weight and price, the tablets will make paper newspapers and magazines virtually disappear in less than a decade. If the price were right, my entire household would switch tomorrow.

One of the big problems, however, is open data formats. The world has become used to the open Internet and there’s no turning back. We also have MP3 (or AAC) files and MPEG4 streams that are also available on all platforms and devices.

Books and book DRM are only a small part of the problem. Yes, everyone but Amazon has agreed upon ePub with encryption (for now Adobe’s, in the long run probably an open standard.) Amazon hopes to make its proprietary format the world standard — even to the point of running TV ads arguing that any client device can read AZW files.

In the long run Amazon’s efforts are doomed, just as Apple’s proprietary FairPlay encryption was doomed. (For that matter, book encryption is as certain to be broken as DVD encryption was, but since the encryption is all in software, the encryptors may be able to occasionally pull ahead of the decryptors).

Today, the vertically integrated bookstores have ridiculous margins due to their lock-in and lack of a resale/remainder market. For example, a hardback Christopher Buckley novel remaindered at $6 was for sale at the Nook store for $10. For a 67% premium, consumers get no distribution, no printing, no inventory cost — and no option to resell or donate the used book.

Once we have open formats on e-books, then consumers will have choice, competition and (as is natural in a free market) distribution will again become a commodity. The price wars for music downloads (cf. iTunes vs. Amazon) and the alternate business models (cf. Rhapsody) will increase efficiency, reduce cost and fuel adoption for the printed word.

But another key content question is magazines: color magazine were one of the nominal reasons for the the NookColor going with power-hungry LCD over the e-Ink of its little sibling and the Amazon Kindle. They were also a great hope for the iPad launch.

The problem is that there’s neither a technical or business solution for tablet-based magazines and other color-heavy news publications. Each platform requires its own custom formatting. Also, as the former designer of NYTimes.com notes, magazine art directors have also gotten carried away with size and features in a slavish attempt to replicate the paper version. There is hope for a common technology format, using Adobe’s tools, to allow creating digital magazines for all the major platforms.

Most of all, there’s the problem of price. Barnes & Noble offers 67 magazines and 24 newspapers. A few are reasonably priced, like National Geographic or a variety of Hearst publications for $2/month.

However, conspicuously missing are the major business magazines: Business Week, Economist, Forbes and Fortune. I was getting ready to buy an electronic subscription to Business Week, but it isn’t available. The three major financial newspapers are available, at a steep price: $15/month for the WSJ and FT, and $11/month for Barron’s. (Not to be outdone, the LA Times, USA Today and NY Times are holding out for $10, $12 and $20/month. Not gonna happen)

Today, we have closed formats, no competition and exorbitant pricing. If it stays that way, paid news on tablets will never catch on. But I think commoditization and competition are inevitable, just as it was inevitable that Disney had to sell DVDs in Southeast Asia for $2 instead of $20.

Then there’s tablet video, fueling the shift away from cable TV and inextricably linked the problem of monetizing Internet video. This is already happening on PCs, and the 7" WiFi-connected tablet is a far more credible replacement for a TV than a 3" smartphone on a 3G network (with a limited-capacity data plan.)

Another loose end is the library. We need a common format before libraries will lend electronic content. We also need cooperation from publishers, which may be delayed either by their greed or (somewhat) legitimate concerns about piracy. I talked to a restaurant manager Tuesday who wanted to buy a Kindle or Nook as a Xmas gift for her daughter: the problem is, her daughter mostly reads library book, and there’s no way either one of them can afford to buy books at Amazon’s (or B&N’s) ridiculous prices to fuel her voracious reading appetite.

Finally, there’s the issue of family pricing. Cable TV, newspapers, magazines and record labels historically provided content for an entire family — just as wired phones once did. Do publishers and media companies expect to sell multiple copies to each household? I know they hope to do so, but it seems as though some form of family pricing is necessary, just as Apple learned to offer MP3 sharing for the entire house across multiple PCs, iPods or cellphones.

Android leads inevitable march towards commoditization

Had meant to write Tuesday about the latest quarterly market share data for Android, but it got buried in between grading, meetings and of course watching the election.

Perhaps more significantly, what can you say? Android market share is monotonically non-decreasing, so every quarter the Google-controlled alliance gets more good news.

Still, the Canalys Q3 estimates were impressive:

Platform	US	World
Symbian	n.r.	33%†
Android	43.6%	25%
iPhone	26.2%	17%
BlackBerry	24.2%	15%
Windows	3.0%	3.0%
Other	3.0%
Total		80.9m

† “Nokia”, not “Symbian”
Apple’s smartphone share has clearly peaked. The iPhone is losing to Android despite its obvious advantage on two key metrics — ease of use and variety of applications. Instead, all that matters are product proliferation and distribution — there are dozens of Android phones at various price points from all the major carriers. You want a keyboard? Or no keyboard? Big screen or small screen? Android has offers these choices and iPhone doesn’t.

Adding Verizon someday isn’t going to change this. And as the dumbphone dies and every phone becomes a smartphone, Android will gain share in the segments Apple is ignoring. Android has made the smartphone a commodity — an adequate OS is no longer an entry barrier — consigning the iPhone to the top 10% niche of buyers willing to pay a premium for better quality.

Meanwhile, Nokia has knifed the Symbian baby by sacking most of the engineers it hired after losing the allies that once vowed to support it (before Android caught on.) Its current path seems to be using its proprietary QT APIs to migrate developers off Symbian to Meego, its proprietary Linux that competes with Google’s slightly less proprietary Linux.

In the near term, the story for Apple on tablets is much more promising, as latest estimates show it with a 95% worldwide market share. (The figures are misleading since it excludes e-book readers, and the Nook Color shows there is no clear boundary between the two categories.)

In Apple’s favor is that unlike cellphones, there is no need for the needless variants and pseudo-differentiation that we see because network operators control nearly all the cellphone distribution. As with the iPod, Apple could conceivably keep a 50+% market share in tablets, assuming it overcomes its irrational (and Newton-like) aversion to smaller tablets and aggressively engages in product proliferation as it does with the iPod.

New niche, no Nook

I've been trying to make sense of the new Nook Color announced Tuesday. The good news is, Barnes & Noble positioned the product away from the two market leaders, the Kindle and the iPad. The bad news is, the Nook Color is neither an e-reader nor a full-fledged tablet, and the existence of a market between these two segments is unknown at best.

Nobody is quite sure what to make of it — which is either a problem or an opportunity. Can it compete with the A-Team?

Compared to Amazon’s Kindle, Forrester analyst James McQuivey claimed “This move puts B&N ahead of both Amazon and Sony.” It’s got color, a touch screen, a faster screen and (presumably) genuine browsing experience. It’s also twice the weight, almost twice the price, is limited to laptop-type battery life and has a fraction of the (paid) content.

Gartner and eWeek say the Nook Color competes directly with Apple’s iPad. It has a color LCD touchscreen that’s almost the same resolution as the iPad and a CPU that’s almost as fast. It’s also half the price and 8 oz. less. However, it’s a read-only device, with almost no apps, and a (as yet unproven) web browsing capability.

	Kindle	Kindle DX	Nook	Nook Color	iPad
Screen	6" grayscale	9.7" grayscale	6" grayscale	7" color	9.7" color
Resolution	600x800	824x1200	600x800	600x1024	768x1024
Autorotate	X	X		X	X
Touchscreen	no	no	partial	yes	yes
Size (in.)	7.5 x4.8 x.33	10.4 x7.2 x0.4	7.7 x4.9 x0.5	8.1 x5.0 x0.5	9.6 x7.5 x0.5
Weight (lbs)	0.53	1.18	0.72	0.99	1.50
Memory	4 GB	4 GB	2 GB	8 GB	16 GB
CPU	532 MHz	400 MHz	≤667 MHz	800 MHz	1 GHz
PDF	X	X	X	X	X
EPUB			X	X	X
AZW	X	X
MP3	*	*	X	X	X
OS			Android 1.3	Android 2.1	iOS 3.2
Price (WiFi)	$139		$149	$249	$499
Price (3G)	$189	$379	$199		$629

Compared to other Android devices, it’s aggressively priced with obsolete software. It runs a modified version of the Android 2.1 found in the Nexus One and Droid X, among others. Someday it will run the Android 2.2 of its nearest Android rival, the Samsung Galaxy Tab. It is not clear if either will run the next release after 2.2 (either Android 2.3 or 3.0), which is rumored to be the OS actually recommend by Google for tablets.

Apple reported that the iPad shipped about 7.5 million units at $500+ each in its first six months. Amazon won’t be honest about its sales — other than vague claims about more than ever — but analysts are estimating 5 million to 6 million Kindles total for all of 2010.

Although Amazon is far more US-centric than Apple, that figure still seems much too low, given the Kindle is 1/3 the price of an iPad. In backing a format, publishers care more about the software than the hardware. All the evidence I’ve seen is that the books-per-reader is much higher on the Kindle than any other device, befitting Amazon’s focus, product design and online catalog.

I’m not sure why B&N is keeping its 2009 Nook on the market, since it’s now quite long in the tooth. Perhaps (as rumored) it will get an Android OS update someday. Or perhaps B&N wants it to use it to generate traffic and upsell the color product.

Even so, it seems to be gambling that the color e-book market will be valuable soon — either with magazines or “children’s books.” (A $250 e-reader for preschoolers? There’s a niche market!)

Against the iPad, it has an MP3/AAC player and (according to the glossy brochure from my local B&N) supports Pandora music streaming. But there’s no Flash yet and no word on any other video streaming — either due to codec availability, processor power or business model lockout.

With all this I can imagine a use case for which the Nook Color justifies its premium over the Kindle and is good enough to undercut the iPad. This would involve reading PDFs, some Android-based magazine apps and maybe a few ebooks, light multimedia usage via the SD card slot and — most importantly — web pages.

To me, the big unknown is the web browsing. With the iPhone, Apple stole almost a three year lead on its smartphone rivals by taking web browsing seriously. None of the other tablet makers have demonstrated that same quality of web experience.

Tuesday’s intro event left the actual browser performance in doubt. As one report put it:

The Nook Color also runs Android’s Web touch browser, but participants at the hands-on event were carefully kept away from actually touching it.

New niche or not, if it can’t browse web pages at my local library or Starbucks, there’s no Nook in my immediate future.

So it’s new, and it’s different. The B&N catalog and distribution should be enough for now to keep it differentiated from its Android rivals, if not the rest of A-team.

However, it seems a little pricey to put under the Christmas tree, and the gap between it and the iPad will only widen when the iPad 2 is (as expected) announced early next year.

The one thing nobody has mentioned is textbooks, both at the high school and college level. Color is de rigueur for the millineals (no Kindle) but price is important too (sorry iPad). If B&N has a braincell in their body, they’ll hire a direct B2B salesforce to hit the ground January 3 to peddle the Nook Color from their 600 college bookstores for on campus classroom use.