Hardware Wants To Be Free

Over at Advertising Age, Simon Dumenco has an interesting post about how a free netbook as a come-on to a subscription-based content service (whether video or e-book) might be the savior of media. That struck me because I think he’s on the right track but perhaps hasn’t gone far enough. For consumers, at least, perhaps we’re seeing the beginning of the end of directly paying for hardware, period.

His argument is that netbook prices are really low, that the ability to use Linux or Android or some other “free” OS makes them even lower, and that plummeting profit margins are going to force hardware companies to become, or at least heavily partner with, media companies, because the computers become about as much of a commodity as you can find. It’s a sound argument, but extends even farther than he mentioned. Back in April, I wrote about how the $100 PC, monitor included, might be on its way. This isn’t a pie-in-the-sky supposition, but a realistic look at what is suggested by street prices on some hardware. Given the price breaks that vendors can get in volume, an under-$300 PC that a hobbyist could build would likely mean a commercial $100 machine (again, with monitor) in sufficient volume.

In other words, not only are netbook prices dropping away to nothing, but so are the prices of all versions of the personal computer. When you talk about the C-note machine, something else comes to mind: the cell phone. Carrier companies have for years significantly underwritten the costs of handset hardware for subscribers, because they could take the loss up front by locking someone in to contractual services, with a termination fee that would at least take care of any remaining subsidy, and then some.

The PC industry has seen such an attempt in the past. There was that period around 1999 or 2000 in which free PCs as part of a subscription service were all the rage. But the economics were far different then. Now the prices really are heading toward the premium world. That has a few implications:

• Hardware vendors need to find a way to make a living — at least on the scale to which they’ve become accustomed. Not all people will opt for a low-end PC or a netbook. Some people will be interested in high-end gaming, or software development, or video editing, process simulation, or something else that requires muscle. But hardware companies will find, as media companies have, that most people can and will be satisfied with the equivalent of a headline and lead-in sentence.
• Cheap hardware needs cheap parts. And that means old assumptions about vendors are no longer valid. Acer and Asus are coming out with netbooks based on a Qualcomm chip and running Google’s Android. Those pushing the bottom limits of pricing will drag much of the industry with them.
• Microsoft is screwed. Not slightly, not significantly, but completely. That’s because cheap hardware requires a cheap operating system. The downward trend on pricing means that even if Windows 7 can run on a netbook, the company won’t be able to get vendors to pay what it needs because the vendors won’t have the margin, and people won’t care so long as they can get online. This has been coming for many years, and is the reason that Microsoft has been so intent on doing something online, or in gaming, or anywhere other than selling Windows and Office. I can remember writing about the future of software being in rental subscriptions back in the mid 1990s. It was clear because there were only so many times you could get people to upgrade their software, and the vendors needed to find some better way of getting a regular income. Microsoft passed on really making software available over the Internet — the obvious way to run such a scheme and make it seem like a benefit to the user — for too long. Maybe the company splits into component parts, with a downsized OS group, one devoted to gaming/entertainment, one for Office, and so on. But the old days of a monolithic Microsoft seem numbered.
• Traditional hardware giants are screwed. An HP or Dell can make servers and perhaps high end specialty machines. As Jon Peddie mentioned in our Q&A, there are some nice margins to be had on specialty machines. Dell bought Alienware and HP acquired Voodoo. They’ll have to concentrate on the high margin devices, and on servers (another type of high margin device) and treat the lower end as fodder for service providers.
• Most of the tech companies have seen the writing on the wall for some time, now. Why did Apple come out with the iPhone? Why did Intel buy Wind River? Why has Microsoft been seeking so urgently to make headway in online and gaming? They all knew that a sea change is coming, and the days of the old structure of the industry were coming to an end. How do I know this? Because they’re not stupid. Stuck in habits and needing to please investors and deal with internal politics, yes. Stupid? No.

I think it’s also instructive to quote something at length from Dumenco, who happened to know that “information wants to be free” is only something out of context:

By now you’re probably wondering how any of this could possibly make me optimistic in any way. Well, I’ll explain, but first I want to quote the rest of the “Information wants to be free” manifesto, which was famously delivered just a little over 25 years ago at the first Hackers’ Conference by Stewart Brand, the pioneering publisher of the legendary Whole Earth Catalog. After he uttered those five words, he continued, “Information also wants to be expensive. Information wants to be free because it has become so cheap to distribute, copy and recombine — too cheap to meter. It wants to be expensive because it can be immeasurably valuable to the recipient. That tension will not go away. It leads to endless, wrenching debate about price, copyright, intellectual property, the moral rightness of casual distribution, because each round of new devices makes the tension worse, not better.”

Hardware is also becoming cheap, though a little shy of being too cheap to meter. However, unlike information, different types of hardware are at the point where one can do what another does. PC, smartphone, tablet, netbook — they can all get people online, get them to applications, and let them download information. In a way, particular hardware often has far less unique value than content, and so may have less intrinsic value. It may be that we are about to see the ultimate commodity product — and ultimate commodity pricing.

Illustration via stock.xchng user ba1969, standard site license.