Wednesday, 22 August 2012

Dead appliances and disruptive devices

The Gadget Graveyard


Here's a list of gadgets you're never going to buy again:

Do you get the connection? All of these are Appliances, devices which are designed to perform a single function. A satnav is a Navigation Appliance, an iPod player is a Music Appliance, and a digital camcorder is a Video Appliance.

Similarly an old school candybar is a voicecall appliance and a Nintendo is a Gaming Appliance (or a get-kids-out-of-hair appliance, depending on your situation).

These things tend to be damn good at doing one thing, but pretty useless at something else.

And in the long-run they are all dead.

Why computers will take over the world


Appliances tend to be associated with the cutting edge. When a new consumer technology, be it GPS or MP3 playing comes along, it is relatively expensive. In order to bring it to mass market you need to make it as cheap as possible. This is where an appliance comes in - by making a completely dedicated device its the cheapest way to package a new technology up at a consumer price point (for an example of a current cutting-edge appliance, check out the Lytro Light Field Camera).

So an appliance tends to offer two advantages. 1) it is generally cheaper. 2) it is very good at performing its role because it is built as a dedicated device.

However as a technology matures it tends to get cheaper. This means it becomes cost-effective to fit it onto a General-Purpose Compute Device. A smartphone is a great example of this. It's a camera, satnav, Gameboy, camcorder all in one! Oh and it also makes phone calls!

Similarly a laptop fits the bill (It plays games! And runs spreadsheets! And browses the web!). As the name suggests these tend to be programmable (and usually have a less specialist device) which means they can be used for a number of different functions. Most have some sort of open platform so new programs can be built to run on top of them.

Now these general compute devices aren't quite as good as a dedicated appliance at performing the job in hand (advantage 2), however you get to a point where the 80/20 rule kicks in. Sure a professional minicab driver needs a satnav and a pro photographer needs a digital camera. But for 80% of us its more than good enough.

And its at this point that the market for the particular appliance crashes:


The charts above show the declines in revenue and volumes for TomTom satnavs and Apple iPods. Both were single-function appliances that were monstered by the rise of versitile touchscreen smartphones with GPS and NAND flash storage (TomTom's were monstered so much that the company actually stopped disclosing volumes and standalone revenues from the start of 2010, so embarassing was the decline!).

Managing disruption


This situation is the nightmare for any incumbent appliance manufacturer. On the one hand they generally have good products, for their function and a significant brand presence.

However their expertise, by definition, is very narrow which leaves them ill-equipped to produce more generalist devices. Typically they will not have much of a platform or eco-system built around their device. And finally the companies which make general compute devices tend to be larger and already have significant brand muscle.

In short you face a bunch of new competitors which are better than you and bigger than you.

In general I have seen two responses

  1. Bury your head in the sand and pretend the threat doesn't exist. (TomTom, Nokia, Flip)
  2. Try to build your own general compute device. (Garmin, Playstation/XBox, Apple)

The first response inevitably ends in disaster. Once generalist devices get good enough the market is moving inexorably against you, and you simply do not have the time (or the capital) to catch up.

The second response often ends in disaster. Garmin tried to build their own Garmin Phone, a laughable ambition given they were up against Apple, Motorola, LG, Sony Ericsson, Every Man + Dog.

However sometimes, if you're smart enough, it succeeds:



Profiting from disruption



Of course this creates great opportunities for the investor - both by shorting the roadkill, and by being long the winners. And as I have written about before, the beauty of this is that once a company start to move into a structural decline there are often ample opportunities to short because these are multi-year events (normally ending in some sort of real or potential balance sheet distress).

And where to find the next appliance story? Well simply go down to your local Currys or Best Buy and look around you. Off the top of my head here are some that spring to mind:

  • Televisions: The biggest appliance out there, in every way. With the rise of internet-connected devices this is the obvious compute platform for the modern home. Everyone, from Apple to Google to Sony is frantically trying to work out how to do this. Because whoever owns the TV-computer will own the biggest advertising billboard in your life.
  • Games Consoles: It is interesting to see how XBox and Playstation has been repositioned over the last few years as connected appliances / stealth set-top boxes. Of all the Appliances currently out there these have the best shot at evolving to general compute appliances. On the other hand Nintendo seem to remain focused on just doing games - a grievous mistake IMHO.
  • Radios: The venerable Audio Broadcast Appliance has had a long run, but at the point internet coverage becomes truly ubiquitous (believe it or not we're not quite there yet!), the radio is dead. Although I will miss having the shipping forecast interrupting Test Match Special - the iPlayer version doesn't include it. 

2 comments:

  1. Some interesting propositions, but are you not restating the innovators dilemma here?

    Marc Andreesen wisely pointed out that software is eating the world – he identified the phenomena, but never really discussed the reasons. Part of this comes down to the fact that most of what you can implement in hardware you can implement in general purpose software, and as the marginal cost of integrating additional components into general purpose computing devices diminish, and we ride the curve of Moore’s law it becomes easier and easier to provide the functionality, whilst absorbing the overhead of a general purpose operating system. If your business model is based on the sophistication of your manufacturing capability and supply chain capability, and the function of your product becomes commoditised in software dramatically lowering barriers to entry to the industry, how do you progress from your current business model to the new one without disrupting your entire company, pissing off your quarter drive investors and sacking large amounts of your work force. A brave decision for anyone – and many are incentivised to maintain the status quo as a consequence of the terror of the alternative. As Nokia and many others have discovered, Denial is a river in Egypt not a business model.

    As you state there is an 80:20 rule here and there is always going to be a trade-off between general purpose and functionally specialised. Convergence provides convenience and price benefits (Software is nearly always going to be cheaper to build than custom hardware +software), but compromise on factors such as usability, battery life, and form-factor. There is still a market for the 20% but the business that serves it is very different from the one that existed prior to the disruption.

    Your point 2 is basically innovation. It is possible to innovate your way out of structural decline – look at IBM – they survived the collapse of the Mainframe (a very sticky enterprise gadget) business after a near death experience, Microsoft are battling to avoid displacement as the traditional desktop becomes a relic of the past.

    I have some thoughts on the TV, Games Console and Radio view, but I need to develop them further. Suffice it to say I think you are underestimating the breadth of vision of Google, Amazon, Apple and Microsoft.

    ReplyDelete
  2. Hello sir.

    re: Innovators Dilemma, in some ways this is applicable. Certainly Nokia would fall into that category.

    In other ways though its the post-innovator's dilemma. Appliance vendors like TomTom or Flip were themselves the innovators. They were the first guys out of the gate with the disruptive technology. The guys who monstered them did not have new disruptive technologies, they simply repackaged them as more useful generalist devices once the product had started to mature. More Second-Mover Advantage than Innovator's Dilemma.

    re: Software this is a very astute point. Software is the enabler/platform than allows an appliance to morph into a general compute device. One way of restating the failures of appliance companies is they fail to build on their initial success to create a software platform/ecosystem.

    I remember TomTom belated tried to open up APIs about two years ago but by then it was far too late. Part of what may make an XBox or PS3 transform from appliance to general compute device might be opening up of the platform to external app/marketplaces (no doubt prodded by what is going to happen once iOS App Store or Google Play land on TVs), but there is a fundamental conflict here with their razorblades make-money-from-software model.

    re: 80:20 model, touche. There is always be a market for TomTom amongst cabbies or cameras amongst specialists. But its a shadow of its former self.

    re: TV yes I have thoughts as well - its what I want to write about next. The thing I really can't get past though is the impasse between content providers, terrified of being iTune-ed, and platform providers who want to do just that.

    ReplyDelete