Endeavour Partners - Blog

Does the iPad herald a new age of connected devices, or is it “just a big iPod”?  Reviews have been mixed.

Apple's iPad: With WiFi for $499; with WiFi and 3G for $629

And even if you love it, will you be willing to pay the extra $130 upfront and $29.99 per month for 3G service, or is WiFi sufficient? (Particularly given that a 3G chipset adds only $7-10 to the BOM).

I suspect WiFi is sufficient, and that the price of 3G connectivity is too steep.  It is too steep, in particular, because in a new era of multiple connected devices each new device cannot come with its own expensive data plan.  It is one thing to pay for home broadband ($40-50) and a smartphone data plan (~$30).  It is another to add a netbook, a MiFi, a connected camera, an eReader, and/or an iPad and have each of these carrying its own contract.

Would you buy a separate data plan for each of these devices?

My family looked at netbooks for Christmas this year, and chose to buy without the subsidy and wireless broadband contract.  The most common use cases for netbooks and iPads are still likely to be in places with WiFi connectivity:  Home, office, hotel, café.  And if you own more than one connected device, then you are better off buying a MiFi portable WiFi hub (from Verizon or Sprint) and sharing 3G connectivity across multiple devices than having a 3G connection for each device.

With this in mind, it actually could make more sense for wireline broadband providers to subsidize netbooks and iPads and connected consumer electronics than for wireless companies to do so.  In our case, the netbook bundled with FiOS Internet or Comcast’s DOCSIS 3.0 service would have been more compelling than the 3G offer.  For the iPad, a purchase for less than $499 with WiFi and a bundle of pre-loaded apps and services (such as Verizon Media Manager or a Comcast TV Everywhere app) from a broadband service provider would be interesting indeed.

For years we (and others) have been discussing how TV shows get financed in a time-shifted and place-shifted world.  If viewers can use TiVo to skip the ads, where does the money come from?  If I cut my coax and go with iTunes or Roku or Vudu, is there enough money left to fund HBO, ESPN, CNBC, etc?

Will we really be lost without Lost?

One possible solution is increased product placements à la James Bond.  There are literally hundreds of examples to choose from, but a personal favorite of mine is the BMW chase scene in Tomorrow Never Dies:

[youtube=http://www.youtube.com/watch?v=smvR7ocyNkM]

In the season premier of Heroes, we saw an aggressive move in this direction by NBC.  An entire scene is dedicated to Claire and her friends playing Guitar Hero 3.  Another scene gets weird:  Hiro and Ando are standing in front of cardboard cut-outs of themselves and a giant cardboard smartphone with the Sprint logo emblazoned across the top – an ad within an ad within the TV show.

Look for more of this to come in future episodes of Heroes and other high production value TV.

The $99 heavyweight

In the past couple years, even months, we’ve seen a sharp decrease in the price of smartphones.  With these high power devices more and more becoming necessities instead of luxuries for mobile consumers, and revenue from data and content based traffic rising, carriers are becoming more willing to subsidize these pricey devices to put them in reach of the average consumer.  And recently the $99 price level, previously reserved for more value oriented feature phones, has been shocked by the introduction of a true smartphone heavyweight: the iPhone 3G.

Even with other carriers beginning to increase value priced smart offerings, such as the newly announced $99 BlackBerry Storm, the value per dollar ratio still leans heavily in favor of AT&T and its iPhone 3G.  To back that up, here is quick overview of the best phones currently available on the value menu:

Verizon

1. LG Dare – A resisitive touch screen feature phone offering haptic feedback and a 3.2 megapixel camera.  Limited by a smaller 3″ screen and lack of a true smartphone OS.  Plus the web browsing experience leaves much to be desired
2. BlackBerry Storm – RIM’s first foray into touch screen phones running the standard Blackberry OS 4.7.  While it carries all the enterprise friendly Blackberry features, it has been criticized for having a cramped keyboard and being sluggish.

T-Mobile

1. BlackBerry 8820 – An aging offering from RIM now eclipsed by the Curve 8900.  Usual RIM enterprise features, but suffers from a lack of a camera.
2. Samsung Behold – Another resistive touch screen feature phone lacking a true smartphone OS.  Has sub-par web browsing and lacks WiFi.

Sprint

1. Samsung Instinct – A resistive touch screen phone lacking WiFi and with bad web browing UI.  Also lacks sizable internal storage.
2. Motorla VE20 – Barely deserves mention in this category.  No full web browser, WiFi, or enhanced OS.

AT&T

1. iPhone 3G – Capacitive touch screen device running the iPhone OS, with good web browsing experience, WiFi capability and sizable internal storage.  Lacks expandable memory.
2. BlackBerry Pearl 8110 – WiFi enabled trackball device with limited internal storage running BlackBerry OS.

This overview shows that there simply isn’t a contender to compete with the $99 iPhone 3G.  As these prices continue to drop, smartphone penetration will increase and it will become ever more necesarry to have true smartphones available at this value menu level.  And of course, this topic begs the question: How long will it be before we see the rise of free smartphone offers?  At that point the feature phone may become obsolete and this current value price level may be reserved for even smarter, heavier hitting devices.

As executives, analysts, and advisors we spend a lot of time arguing about metrics and data, and where we need to be to survive and thrive in the market place.  An old joke reminds us that relative performance is all that really matters:

Two hikers are cornered by a bear and climb a tree.  One of the hikers reaches into his backpack, pulls out a pair of running sneakers and starts lacing up.  The other says, “What are you doing?”

“I figure we will have to jump down from here eventually.” says the first.

“But you will never be able to outrun the bear,” says the second.

“True.  But I figure all I really have to do is out run you.”

We are bombarded with random statistics on companies and products and financial performance, but it is important to realize that context matters:

• who are the key competitors?
• what is the real playing field on which we are competing?

Getting the right basis for comparison is critical to both understanding current performance, and to deciding what to do to improve future performance.

There is currently a great deal of interest in Apple’s iPhone and the Palm Pre and comparisons abound regarding sales and usage figures.  Most of these comparisons are confusing and not terribly helpful.

For instance, the Palm Pre sold around 370,000 units in its first month of sales while the new iPhone 3GS sold roughly 1 million units in its first weekend.  iPhone users have downloaded over 1 billion applications while Palm Pre users have only downloaded about 1 million.  Clearly the iPhone 3GS is outperforming the Palm Pre on an absolute basis, but does this make the Palm Pre a failure?  What are the right measures to make an ‘apples-to-apples’ comparison?

Some additional information and framing can help us decide:

• the Palm Pre is supported by Sprint (49M subscribers) in the US while the iPhone is supported by AT&T (62M subscribers) – and Sprint has been losing subscribers while AT&T has been growing them
• the iPhone is available in 88 countries while the Palm Pre is available in only one (although it will soon launch in several others)
• the iPhone 3GS is a third generation product while the Palm Pre is a first generation product

While looking at raw recent sales statistics the iPhone 3GS has nearly a 30x advantage over the Palm Pre, but comparing the Pre against the first generation iPhone and viewing these statistics on a cumulative basis since launch, the Pre looks much better:

Palm Pre on track for strong growth

Even more compelling, however, is a comparison of one quarter of projected Palm Pre sales vs. Sprint’s prior quarter subscriber net losses.  The Palm Pre represents a radical change in outlook for Sprint, perhaps singlehandedly moving them back into subscriber growth:

The Palm Pre has the chance to singlehandedly move Sprint back into positive growth

Roughly 34% of Palm Pre buyers have been new customers to Sprint, similar to the iPhone’s 30-40% new to AT&T numbers reported at this stage.  But much more importantly, the other 66% of Pre buyers stayed with Sprint while upgrading devices rather than switching away from Sprint to other networks for an iPhone (AT&T), Blackberry Storm or Tour (Verizon), or Android G1 (T-Mobile).

It’s early days, but at least so far the Pre is doing better for Sprint than the iPhone was for AT&T at the same time. Longer term, Palm faces significant strategic challenges in building its ecosystem and attracting application developers.

Last week, I posted a quick analysis of Apple’s App Store, which is on pace for over 3.2 billion application downloads by year end.  We tried to do a similar analysis for other platforms such as BlackBerry and hit a snag:  There is little or no information available for BlackBerry App World.  See below:

Blackberry App World has not released download stats

As we dug deeper, we found good reasons for this dearth of data.

First, BlackBerries sold through major network operators do not come with App World pre-installed; hence one of the key questions is how many BlackBerry users have downloaded, installed and set up App World.

Another challenge is that users can get BlackBerry apps from a variety of alternative sources, including:

• developer websites — for example, the excellent Google and Facebook apps for Blackberries are often acquired directly from the web and sent via email link
• Handango website — may be the leading single source for Blackberry apps
• Handango InHand — a pretty good 3rd party app store, downloaded to many BlackBerryies after Apple’s App Store became popular and before RIM’s own BlackBerry App World launched
• network operators’ websites — verizon.handango.com, for instance
• network operators’ app stores — mostly focused on ringtones and games; VZAppZone and AT&T Media Mall are examples

All this choice is confusing for both end users and for application developers.

Moreover our survey of retail store personnel at major US network operators found that they were either or both ignorant or unsupportive of App World when asked about how to get apps for BlackBerries:

• Sprint personnel did not know of any way to get applications onto a BlackBerry and began pitching the Palm Pre as a better device for apps (despite the fact that at present it only has 30 apps, and it’ll be late summer before the SDK has widespread availability)
• T-Mobile personnel knew there was a BlackBerry source for apps, but did not know the name or how to get it
• Verizon’s sales people pushed VZAppZone as an alternative for BlackBerry applications
• only AT&T front line personnel immediately knew about Blackberry App World and described how to find and install it (is this in someway a spillover effect from their learning with the iPhone and its App Store – experience that sales people at other network operators just do not have?)

Given little or no support from network operators, App World must first be discovered and downloaded by users; like any innovation, without information there’s no adoption. In addition, users must have a PayPal account or sign up for one to purchase apps on App World.

Here is a step-by-step comparison of first time use for Blackberry App World vs. Apple’s App Store:

Typical App World vs. App Store first time experience

Guess which application storefront has “Billions and Billions served” and which one has so far been less than forthcoming with performance metrics?