Reducing the Effects of Cannibalization

Eight low-cost computing devices were on display at last week’s CeBIT conference in Hannover, and at least 16 more are set to hit the market in the coming months. This, combined with the news that Intel anticipates shipments of 50 million Atom-based processors in 2011, signals that low-cost computing is not a fad. Not everyone is excited about the budding low-cost computer market, however. At Sony’s annual Las Vegas Open House event, Mike Abary, Sony’s senior vice president of IT products, warned that if Asus’ Eee PC finds a market outside tech enthusiasts and developing countries, “We are all in trouble. That's just a race to the bottom.” Abary may not be speaking for everyone at Sony, but his comments had the ring of someone who is trying to fight the current.

Cannibalization from lower-priced products is a fact of technological life, fueled by innovation and cost-saving efficiencies. Companies can push back and resist cannibalization only for so long; eventually they must either play in the new space or accept their role in a limited, higher-end market. Sony seems to be missing the opportunity that its multinational competitors are beginning to recognize in low-cost computing. HP, Dell and Acer are expected to join the sub-$500 laptop space later this year. Whether or not these new laptops will be standard or sub-notebooks is yet to be disclosed.

While many manufacturers are focused on ever-decreasing prices through sub-notebooks and mini-PCs, an opportunity remains to provide a standard, high-quality and profitable product. Vital Wave Consulting research shows there is demand among first-time PC consumers in emerging-market for “real” computers instead of “alternative” computing devices. While not as interested in bells and whistles, these new buyers desire the support, reliability, sound construction and usability that warrants what amounts to such a significant investment for lower-income customers. PC manufacturers that opt out of the sub-notebook market can still provide high-quality, basic computers in traditional form factors along with financing packages to enable the purchase of these perhaps more expensive devices. Doing so would attract this sub-segment of first-time PC buyers and provide an alternative and profitable point of entry into emerging markets. With such an opportunity for Sony, perhaps Mr. Abary has less reason to be gloomy.

Also in the news:

• Why SMS is lagging in India
• Spice introduces sub-$20 cell phone in India
• Via and Bitway release low-cost PC in Brazil

Google's China Push Tests Out New Business Models

Last week, the Wall Street Journal (WSJ) delved into Google’s latest strategy to compete with Baidu, a formidable (and market-leading) search engine competitor in the Chinese market. Google has not been shy about its plans to beat Baidu on their home turf and a new joint venture with a Chinese online music company shows they are going for Baidu’s jugular. Baidu’s success rests precariously on popular free, unlicensed music downloads, straining relationships with the Chinese (and global) music industry. Google’s strategy to compete in China features free, high-quality, licensed music downloads in return for a share of ad revenues and download data for music labels.

While the WSJ focused on the horse race between Google and Baidu in China, they undervalued the article’s true technology business nugget – the music industry’s willingness to sign on to an entirely new business model. Universal Music Group has already agreed to participate in Google’s new scheme, and EMI Group, Sony BMG Music Entertainment, and Warner Music are interested. Vital Wave Consulting research has found that a non-traditional partner paired with a new business model can be a potent mix in emerging markets like China. And emerging-market consumers - even those with little disposable income – rank entertainment high on their list of basic needs. With music industry sales down and illegal music downloads outnumbering licensed downloads 20-to-1 worldwide, the timing is right for music labels to consider new ways of profiting from the ubiquitous online distribution of songs. With this solution, Google may manage to find a way to meet user demands for free music with the blessing of the record labels. Moreover, with China Mobile already signed on as a key partner for Android (Google’s open source mobile platform), this could have far-reaching implications for song distribution via mobile phones in one of the world’s largest markets.

If Google successfully applies this model in China, there is little to stop them from expanding it to the developed world. The flow of developing-country innovations to mature markets is increasingly common (e.g., pre-paid phone cards and mobile payments). Google’s music distribution scheme could eventually affect the technology and entertainment industries in the U.S. and Europe. The search giant’s competitors would be wise to secure non-traditional entertainment partners who would value alternative monetization schemes such as ad revenues. These creative partnerships will attract eyeballs and revenues in markets worldwide.

Also in the news:

• Handset manufacturers learn emerging market lessons
• Government rhetoric slows ICT growth in Africa
• Mobile phone, not PC, bridges digital divide