In And Out Of Focus

9 11 2011

For all the grumbling we consumers do about the price of gas, clothes, food and housing, there really are some things just keep getting cheaper. Like TVs. Just this last evening I was perusing the fine selection of LCDs, LEDs and plasmas at Target. It’s hard to believe that a 32″ LCD can be purchased for a mere $299. A decade ago, a 42″ plasma cost about $10,000. Now we can afford to have snazzy TVs in every room.

Of course, we all know the story of computers. Moore’s Law states that capacity (of integrated circuitry) will double every two years. A corollary to that law, though, is that the cost will halve. We thus have the equivalent of 1970s-era mainframes in our living rooms or backpacks, which we purchased for a few hundred bucks.

Ah yes…technology. The one category in which things truly get better and cheaper as time goes by.

Yesterday’s announcement by Microsoft of the $50 Samsung Focus Flash smartphone is no exception. Yes, for a mere half-Benjamin, folks who have not yet taken the plunge can join the rest of us OCD people who put our brain on the nightstand before retiring.

I’m sure that Chris Anderson, Editor of Wired Magazine and author of Free and The Long Tail, is feeling pretty good about things. After all, he seems to think that most prices are headed south anyway. It’s just that I have mixed ring tones about this cheap phone.

Never mind that the folks quoted in the article have their facts all wrong. Thanks to the iPhone 4s, the US now has a 50% penetration rate, not 30%, for smartphones (among the 90% of people with any cell phone at all). If Microsoft thinks that 70% of the market sits untapped, they may be in for a rude surprise. Furthermore, an analyst is quoted as saying that data plans cost $80 a month, which is simply not true. Maybe the entire cell phone plan and data, but not data alone. AT&T data plans run $15-25.

With people like these helping run the show, I can’t help but wonder if Microsoft’s latest foray into smartphones is also doomed.

And let us not forget that people have already become very brand- and operating-system loyal (the Cult of Apple vs. the Android OS). I have a hard time believing there is room for a third system. Just ask the nervous resume-updating people at Blackberry what they think about that.

Just thought I’d throw that out there.

In fact, Microsoft’s share of the smartphone market hit a new low in 2Q of 2011. In 2010, its Kin phone lasted a…wait for it…whopping six weeks. Yes. Six weeks. And then it was kindly taken off life support.

True, Microsoft is implicitly admitting it is going for the price-sensitive market, the late-majority and laggards who have not yet made the transition. But where is the profit in that model? It’s like an old episode of I Love Lucy. What Lucy and Ethel lose per bottle of salad dressing, they’re more than make up in volume.

Sure. Knock yourselves out.

Perhaps the irony of the largest software maker having to suck it up and be a bottom feeder is lost on the moment. I just can’t see this leading to any big sales spike for MSFT. Sure, they’ll no doubt grab a few folks who wouldn’t or couldn’t get on the Apple-Android train. But the money (unless you’re Apple) isn’t in the phone. It’s in the service plans. That’s where AT&T, et al, are poised to be awash in profits for many years to come. It would be different if Microsoft could sell the blades for this razor, but it has none to sell.

I really doubt that Apple and Android will respond in kind, especially Apple. The cachet of owning a supercharged smartphone would be lost. And Steve Jobs would turn in his freshly dug grave.

Which is another way of saying that I am yawning right about now. Were I a MSFT shareholder, I’d have even more reason to sell. You see, while dropping prices may be good for consumers, they are seldom good for manufacturers, unless there are parallel and even disproportionate cost drops. Let’s look at it in the opposite direction. If Exxon Mobil makes 20% profit on each gallon of gas (let’s assume $3.30 a gallon), that means they make about $0.66 each time we pump a gallon. But if gas were $5 a gallon, that same 20% would be $1.00 profit.

And now you know why Exxon Mobil shares are at about $80 these days. The more expensive the gas, the more dollars of profit, even though the profit margin remains the same.

So unless MSFT can not only reduce costs on these phones, but also increase profit share, this project won’ be able to get a dial tone.

Dr “Sorry…You’re Breaking Up” Gerlich

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