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« Canada to Embrace Permission Culture? | Main | Cable Theft or Cable Sharing? »

June 1, 2004

It Is All About Locking Down the System

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Posted by Ernest Miller

Three Items:

Item 1) Below, Donna notes that a recent consultancy report rings the alarm bells about the use of open software platforms on cell phones (Dumb Mobs). If people have the opportunity to run the free services they want on their cellphones, they may be able to avoid paying for similar services. For example, dialing 411 costs money, doing a number lookup via one of dozens of websites is free. The point is, service providers have to lock down the hardware with DRM to make money on the service.

Item 2) Reuters reports that Sun's President and Chief Operating Officer Jonathan Schwartz predicts that hardware will be free in return for paying for a software subscription (Sun Rolls Out New Hardware, Software, Services). Slashdot readers respond (Sun Says Hardware Will Be Free). Actually, this is sort of how the cellphone market works today. Buy a service subscription and you get a free phone, but see item 1 above.

Indeed, the cellphone market model is already struggling and will only struggle more in the forseeable future. If this is the model Sun is adopting ... I'd sell Sun at this point.

Read on...

The problem with the cellphone market is that it is desparately trying to evolve new functionality. Without neat new functionality I have to get, I'm not going to want to upgrade the hardware.

I buy the 1-year contract in exchange for the phone. If at the end of the year, I'm still happy with the hardware, I'm going to be able to push hard for a good deal on the service - especially with number portability. If the service providers can't tempt me with a new phone, I have significant bargaining power. If the phone is an open system my power is even greater.

One has to wonder how well this free hardware/subscription services model will work with the PC. Why would anyone want to subscribe for browser or word processing software? How much value will software upgrades through subscription provide for software that is pretty darn mature as is? The console market struggles with subsidies for things like XBox, but free is far more than a subsidy.

Item 3) Rumours are rampant in the Apple community that the next big thing from Apple will be a projector (Apple Projector - New Hardware for Apple Movie Store?). Now, I don't think the projector idea makes a whole lot of sense, but this line from the article caught my eye:

If the iPod was the trojan horse that allowed Apple to secure its place as the leader in DRM'd audio file formats, a movie projector that doubled as a computer could just as easily do the same for the company's computer install-base.

An almost throw away point, but an important one. Through DRM, Apple is attempting to garner control of the music distribution market. It isn't about protecting against piracy. It is only marginally about selling iPods. It is about controlling distribution.

Comments (5) + TrackBacks (0) | Category: IP Abuse


1. Brad Hutchings on June 1, 2004 4:59 PM writes...

So Ernest, you have identified three market opportunies where customers should be crying for open systems and suppliers would be catastrophically stupid not to work with you. To paraphrase Steve Jobs talking to John Scully... Do you want to blog all your life or do want to do something that makes a difference?

Permalink to Comment

2. Ernest Miller on June 1, 2004 5:04 PM writes...

You want to write snarky comments on someone else's blog, or will you do something that makes a difference?

You have funding? I've got a number of great ideas that could use it.

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3. Brad Hutchings on June 1, 2004 5:21 PM writes...

Your examples are totally off base. Take Sun. They basically sell servers, high-end workstations, and thin clients. The high end server market always wants to reduce costs and increase reliability, the emerging low-end server market that would buy Sun instead of a Linux box would like low cost appliance-like behavior. A fairly closed system where Sun takes care of everything might make a lot of sense to these customers. In your post, you link Sun's strategy musings to renting of word processing software, which is a total misunderstanding of what people do with Sun's products. Sun even GIVES AWAY office software, for crying out loud! My comment may have been snarky, but seriously, closed systems actually offer tremendous value to some customers.

If you think that market segment is negligible and that a completely open system would be a better success, this is America... Put a business plan together. Some open systems have been very successful (the Internet) and possible to monetize. Some have enjoyed niche success (Linux) but not easy to make money with. Maybe you can come up with one for music where it would make economic sense for artists to play instead of DRM'd systems like Apple's. But I'm skeptical.

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4. Ernest Miller on June 2, 2004 12:02 PM writes...

The only place we've really seen the hardware is free market work is the consumer space, and that is sputtering along. I really doubt it will be terribly successful in the corporate space. What benefits would most corporations get out of such a deal? After all the old IBM model was rent the big iron ... very few accept that deal anymore.

I've put business plans together - several. I even led the team that won 2nd place in a state-wide business plan competition for graduate students (beating out a dozens of MBA students). However, getting funding isn't easy.

In any case your argument boils down to "if you're so smart, why aren't you rich?" Unfortunately, while capitalism works best in the aggregate it doesn't mean that it works perfectly in every situation.

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5. Seth Finkelstein on June 3, 2004 4:42 AM writes...

Why all the reaction over what seems to me a fairly pedestrian comment by Sun that the future will likely have more of "Give away the razor, make money on the blades".

As sophisticated hardware becomes cheaper, using it as base for services as a profit center is more workable. Yawn (over the general idea).

Of course, that means the vendor has to try to make sure someone doesn't provide compatible interoperable service - hence the Lexmark v. SCC case and similar ilk. That's a danger.

So I suppose the reply to "Why not innovate?" is that "It's likely to be against the law."

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