Battle Pawns

Many of us got it wrong. We assumed leadership in the OEM market would be determined by hardware sales, but it instead revolves around a solid ecosystem. The shifting landscape of the tablet market has made it clear that the war for dominance in the information technology world will be won by companies that build vibrant ecosystems, rather than mere hardware.

Let's start by redefining the OEM. The group traditionally consisted of hardware vendors like Hewlett-Packard, Apple, IBM, Dell and Motorola Mobility. Scratch that definition. {complink 3426|Microsoft Corp.} changed the classification when it introduced the Xbox. Today the OEM universe is now populated by companies as diverse as Barnes & Noble (traditionally a retailer of books) and Amazon, which started out as an online retailer. Any company today — your pharmaceutical services provider included — can easily morph into an OEM. That reclassification has major implications for the electronics supply chain.

Take the events of the last week. Just as {complink 4644|Research In Motion Ltd. (RIM)} was announcing a $360 million after-tax writeoff on its BlackBerry PlayBook inventory, a research firm said {complink 11480| Inc.} would hop to No. 2 on the global tablet vendor list in the fourth quarter on the back of surging demand for its Kindle Fire. RIM is a traditional OEM, but Amazon is beating the stuffing out of its older rival.

What's the other key difference between the two companies and their products? In my opinion, it comes down to pricing and the ecosystem in which they operate. Amazon is deploying hardware to expand its ecosystem, while RIM is presiding over a shrinking base. The BlackBerry PlayBook retailed initially for $499 to $699 depending on the model. Amazon's Kindle Fire debuted at $199, and the cheapest in the series is available at $79. Pricing, as I pointed out in another blog, will decide who wins and falls in the tablet market — and this applies to {complink 379|Apple Inc.}! (See: Apple Can Be Beaten.)

Companies that cannot or are afraid to sacrifice hardware margins will be trampled. Those that draw in customers into a tighter relationship will be triumphant. Many people have wondered on EBN and elsewhere how Amazon could be selling its Kindle e-reader below estimated production cost. EBN community editor Barbara Jorgensen raised this issue in a recent blog, pointing out that the Kindle Fire costs about $201.70 to manufacture yet is on sale for slightly below that price. (See: Is Hardware’s Loss Retail’s Gain?.)

There are no great mysteries here. In fact, the briefest explanation is that the Kindle Fire offers a direct portal to Amazon. A deeper reason is that Amazon is raising the stakes by building an ecosystem that has thrust it into the tablet war but allows it to be more competitive against the equally solid ecosystem Apple has built with customers worldwide. Both companies want your money, and they win only by offering new and compelling ways to keep the relationship fresh. That meant Apple — a traditional OEM — had to become a retailer (of music, apps, books, video, etc.), and it meant Amazon — a traditional book seller — had to become an OEM.

Now, back to that ecosystem issue. RIM has failed in the tablet market for now because it didn't tightly weave its already extended family of BlackBerry smartphone users into the network. It offered BlackBerry users (I am one) no reason to buy the BlackBerry PlayBook tablet. Many BlackBerry customers stayed away, even though they were the natural primary market. The PlayBook existed outside the BlackBerry ecosystem.

{complink 2376|Hewlett-Packard Co.} took the RIM route, and its TouchPad slumped. Many other tablet makers are using this unimaginative formula. They created a product and went in search of a market without a compelling narrative. It shows in their sales. The iPad, the Kindle, the Kindle Fire, and even Barnes & Noble's Nook have strong marketshare because they are associated with ecosystems that customers love, but that's not the case with products from HTC, Motorola Mobility, Sony, etc. Tablets from these companies will also fail unless they become central to customers' purchasing lifestyle.

14 comments on “Battle Pawns

    December 5, 2011

    Well said.  It is a very solid strategy to give away the razor and sell loads of blades at a profit.  Hardware is the easier part of the ecosystem puzzle these days…..content is king.

  2. Barbara Jorgensen
    December 5, 2011

    As usual, you hit the nail on the head. Whichever way you get there, Apple and Amazon want the same thing: the hearts and minds of consumers. Well said!

  3. bolaji ojo
    December 5, 2011

    Barbara, I wonder, though, what should the other players do? It's not possible for all of the other players in the market to develop an ecosystem as strong as the ones Apple and Amazon have built. But everytime I think it's going to be extremely difficult to defeat these companies, I am reminded that Apple didn't have a similar ecosystem even five years ago while Amazon just broke through the crowd to establish a major position in the tablet market. So, what do these two companies have that rivals lack and how do they develop that market-winning strategy.

  4. DataCrunch
    December 5, 2011

    RIM is attempting to stay relevant via software rather than hardware (may not have a choice at this time).  Their BlackBerry Enterprise Server (BES) product will soon support iOS and Android devices, which corporations will be able to control the security and IT policy parameters for a multitude devices. This represents a major strategic shift for RIM, which has generally only provided support for its own smartphones. Now if they claim to provide all the advanced security features for other devices as they do with their own BalckBerry devices, this could be very good for RIM.  If they don’t, but claim they do, then they are their own worst enemy, as they can’t afford any more bad press.

  5. _hm
    December 5, 2011

    How Samsung will manage in this Tablet market? They have very good product but do not have eco system.

  6. bolaji ojo
    December 5, 2011

    _Hm, Samsung is a part of the Android ecosystem but this may not be enough. The Android ecosystem represents only the operating system whereas the Apple and Amazon ecosystems are each part of a system of retail, purchasing, etc. Android offers some of these but they are too diverse and are not bound into the system but are instead composed of a hodge podge of retailers.

  7. SunitaT
    December 6, 2011

    @Bolaji, do you think this trend will help Nokia because Windows has already built its own ecosystem and it has loyal windows OS users ?

  8. Taimoor Zubar
    December 6, 2011

    “RIM has failed in the tablet market for now because it didn't tightly weave its already extended family of BlackBerry smartphone users into the network”

    Interesting point, Bolaji. I do agree that RIMs should have extended the Playbook to existing Blackberry users. A good way would have been to give them an option to tether their phone with the tablet and use internet simultaneously.

    However, it's also interesting to note here that Apple didn't do anything like that. The Apple iPhone and iPad existed and got sold as two different products and there was no package deals involving both of them together.

  9. jbond
    December 6, 2011

    This was an excellent article that hit the bulls eye. Amazon is going to be successful because they are bringing in people with a lower cost and offering huge amounts of content through a direct portal to Amazon. I would have to say at the moment, Amazon poses the largest threat of market share to Apple.

  10. Barbara Jorgensen
    December 6, 2011

    Bolaji–one of the points in iSuppli's report on the Fire was the disruption it has caused within the Android community. So your point about building a strong ecosystem is right on–it is going to be tough for other players in the market to do so. Apple and Amazon have the music, video and merchandise market pretty well sewn up. I think your point about RIM is spot-on: Here, they had a base of Blackberry (service) users already in place, but they blew it by dropping the ball on their hardware development.

  11. t.alex
    December 6, 2011

    I believe so. Windows phone may have huge base of developers.

  12. Anna Young
    December 6, 2011

    “Both companies want your money, and they win only by offering new and compelling ways to keep the relationship fresh. That meant Apple — a traditional OEM — had to become a retailer (of music, apps, books, video, etc.), and it meant Amazon — a traditional book seller — had to become an OEM”

    This suggest to me that Apple and Amazon seem to know how to gain consumer's trust. Amazon has be able to lower the sale price of its product, whilst Apple is winning on applications and other means. I wonder how the likes of RIM and other OEMs will fare in this power tussle?

  13. bolaji ojo
    December 6, 2011

    TaimoorZ, Apple didn't have to link the iPad and the iPhone with its existing ecosystem. They are a part of it. A leopard doesn't shout its spots, by the time you see it you're headed to the lunch table. The iPhone was almost certainly a high-end replacement — for some — for the iPod music player. The functionalities of the iPod were built into the iPhone. The iPad operates on the same basis, that is, you can download music, etc., and buy the same apps available on the iPhone and the iPad. They are all in the same iTunes, iBuy family.

  14. William K.
    December 6, 2011

    The reality in sales of (fairly expensive) consumer item sales seems to look a bit like the sales we see to industry. Sometimes customers buy a “thing”, but usually what they want to purchase is a “system” that fulfills a specific need, or possibly a broad need. It seems that the description here is one of exactly that.

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