Kindle Fire - The Price Is Right

Today, Amazon announced the long awaited Kindle Fire, a new tablet based on the Android mobile operating system. While the announcement was expected, the aggressive price has caught many by surprise. $199 for an Android-based tablet makes it the most aggressively priced tablet on the market. But is that the right price? Let’s take a closer look!

The $199 Kindle Fire could be a game changer

The entire tablet market should be grateful to HP for having recently conducted the largest price elasticity of demand (PED) test ever. If you remember, HP launched their TouchPad with the base price of $499.99. They reportedly manufactured 270,000 of the TouchPads, but after several months of trying, they had sold less then 10% of their inventory (25,000). After pulling the plug on the device, they sold the remaining inventory within hours for $99 a piece.

Being a marketer (and a techno geek), I actually tried to compute the price elasticity of demand for the TouchPad, coming up - as expected - with a high negative number. I got -549, but it’s been many years since business school (note: yes Professor, I have simplified my case by ignoring any substitutes, necessity factor, purchase power, brand loyalty, blah, blah, blah...doesn’t matter in this case). That low of a number means that the price is highly elastic which in turn means that buyers strongly respond to price changes. Duh. It also means that to optimize revenue (or better to grab as much market share as possible), you have to price the product near its marginal cost. Again, not a surprise - you make something and you want to sell as much of it as possible, you keep the price as low as possible to the cost of making it. Duh.

The cost of making the iPad is approximately $229 and we have to assume that Amazon could be in the same range. They can probably sell similar volumes as Apple has and thus have a similar negotiating power with their suppliers. The Kindle Fire might be a tad cheaper to manufacture with less memory and a smaller size. That suggests that at $199, Amazon is pricing the device at or just below cost - as my little price elasticity test suggests.

BTW, if you dismiss my simple price elasticity calculation and instead want to believe the efficient markets theory, you should remember that the discounted TouchPad was selling on eBay for $250. That seams to be the optimal price point at which the demand and supply clear.  Even if Amazon is losing $50 on each Kindle as the Piper Jaffray analyst Gene Munster suggests, it doesn’t matter. Amazon is not looking for any margin contribution from the Kindle Fire (or any Kindle). They are looking for market share and units sold - eyeballs. The margin comes from the content which Amazon can sell to the people who have their devices.

This is also the reason why the other Android vendors such as Samsung, Acer, HTC, LG, Dell, etc cannot play this game. Even if they can match the cost of manufacturing their devices, which I doubt as their volumes are not anywhere near the millions of iPads Apple sold and the millions of Kindle Fires that Amazon is likely to sell, they still need the devices to generate positive margin contribution. They don’t have any content to sell to offset that. Apple, on the other hand, is sitting in the perfect spot today by getting margin contribution from both, the content and the devices. Beat that, … [everybody else]!

The content is critical. The Nook by Barnes&Noble is a comparable reader to the Kindle Fire and it has been on the market for several months now, priced at $250. But since B&N doesn’t have anywhere near the reach of Amazon with its online store, the device hasn’t made a dent into the market shares. Amazon’s new Kindle Fire is no slam dunk but given the success of the original Kindle, we have to assume that they are now a serious player. This is particularly true given the aggressive price of the device with an entire content ecosystem under their control - anything from e-books, magazines, to music and movies.

And so what will happen next? Amazon Kindle Fire is likely going to grab some significant market share in the tablet market. Apple may experience some pricing pressure but will still have the benefit of the Apple brand and user experience - the same brand that permits Apple to charge a premium on their iMac and MacBook computers. While the prices might come down a little, I wouldn’t expect any $199 iPads anytime soon.

All other manufacturers are in trouble. Microsoft must quickly deliver a tablet at all costs because with Kindle Fire, there is another runaway tablet on the market using zero code from Microsoft. All the Android vendors, except for Motorola, who’s now engaged to Google, have even more reason to reconsider their Android bet. They are going to be forced into a price war with Amazon which they can’t win given Amazon’s scale and pricing power. Switching into the Microsoft camp might be the only sustainable move left for them. But the longer Microsoft waits, the less market share will be left to grab. As for RIM, the PlayBook looks like an official failure now and their options are shrinking fast...

Customizations - Heaven or Hell?

There are many traits that make enterprise software different from consumer software or even software packages used by small organizations. Scalability, security, and the ability to integrate with other software usually come to mind. But none of them are as polarizing as the ability to customize enterprise software deployments.

The idea is pretty simple. As organizations compete with each other, they want to tailor the deployed solutions to match their business processes and other organization-specific needs. Enterprise software vendors usually design their software in a way that allows for a significant amount of customization with technologies such as modular architecture, web services, application programming interface (API) and software development kits (SDK).

You might think that all of this is going away in the new world where software is delivered as a service (SaaS). It is certainly true for the SaaS software that targets the small and medium sized businesses or simple generic applications. But if we consider the leader in SaaS - Salesforce.com - as the sign of the things to come, we must realize that most of the Salesforce deployments today are being heavily customized.

Customizations are important. In fact, a big part of the appeal of open source software is the ability to significantly customize it; even re-write entire functionality modules given that the developers have the actual source code. Of course, customizations matter in the world of commercial ‘closed source’ software just as much.

Customizations, however, come at a price. Not only does a typical enterprise deployment often require an investment into professional services that comes at a multiple of the cost of the software licenses, customizations also carry a significant hidden cost.

Every time the software goes through an upgrade cycle, the customizations have to be upgraded as well. There is no easy way around it even if the vendor provides tools to make the work easier. Those are your customizations, they are a one-off type of software and nobody but you can upgrade them. Often the work to migrate the customizations can be significant. If the customizations actually contain significant amounts of original code, migrating them may be akin to a complete re-write.

Consequently, customers tend to struggle to keep up with the vendors who are trying to maintain the pace of innovation. It is important, that the customers are allowed to do that - not to keep up. The ability to skip a version is becoming a critical requirement for enterprise software. Many vendors handle it by providing the notion of safe-harbor releases that ensure that from here, you can move to the next level at your own pace.

In the end, there is no magical solution. Customers shouldn’t avoid customization because they do need the competitive advantage that highly customized software can provide. In many industries such as insurance or financial services, there is very little differentiation possible on the product side. Car insurance is just car insurance and mortgage is just a mortgage. Only the customer experience and the process efficiency can differentiate competitors. Those differentiators require customized software. But customers have to think beyond the customizations of the current release. The ease of migrating customizations is one of the key issues overlooked by many vendors in their slick demos.

Consumarization of BPM

Business process management (BPM) is a high growth market that delivers significant return-on-investment to customers who deploy these solutions to improve their efficiency. Still, many people think that BPM is just a boring back-end technology. I know that hipness lies in the eye of the beholder but I’d argue that social media or gamification are getting more attention than back-end technologies such as data warehousing, archiving, or BPM.

There are several new trends in BPM that make it just as exciting as Jive Software except much more profitable. One of the trends is social BPM which employs social networking capabilities to allow for better decision-making in business processes. Long gone is the era of business processes that attempted to cover every single permutation of possible conditions to route the task in a predetermined path. Too many exceptions were typically the result and, in the end, the majority of decisions are best done by humans. It is the social software that can quickly help to identify and get together the right experts to help them make a decision.

Another important trend in BPM is mobility. As much as mobile devices are becoming the primary user experience, not everything we do in the office has the same appeal for a mobile user. Reviewing or editing documents works well on a tablet but it becomes pretty tedious on a smartphone. Interacting with a business process on a smartphone, however, makes a lot of sense and it is exactly here where a lot of customers realize the greatest benefits from mobility. So many process steps used to sit idle, waiting for the user to get back to the office since the email-based alert didn’t provide enough context to make a decision. By taking BPM mobile, the process apps are easily tailored to make users very effective to handle any process tasks.

Even submitting travel expenses can be pretty cool

Finally, BPM is also moving to the cloud. Besides the obvious appeal of shortening the deployment cycles by hosting the BPM software as a service, BPM can also benefit from making its functionality available to users easily. In any business process, it can happen that a particular expert needed for a specific task cannot participate since he or she doesn’t have access to the system. The cloud based approach makes BPM easily accessible. A good example of a cloud based activity is collaborative process design which frequently requires many stake holders to participate, even if some of them will not be involved in the actual process execution.

Clearly, the consumarization of the enterprise has reached BPM just like so many other disciplines of enterprise software. And who says that BPM is just a bunch of back-office technology? With the latest trends such as social BPM, mobility, and cloud, BPM is becoming rather hip. And it continues providing very compelling benefits such as higher efficiency, lower cost, or better quality.

HTML5 vs Native Apps

The mobile world is split today into mobile apps and the mobile web. With some 400,000 apps available on the iTunes App Store today alone, it appears that native mobile apps are the preferred way of user experience on mobile devices. It might, however, not stay that way when HTML5 becomes widely adopted. Or will it?

The HTML5 standard - developed jointly by the World Wide Web Consortium (W3C) and the Web Hypertext Application Technology Working Group (WHATWG) - is currently being heralded as the panacea for all problems ranging from the current limitations of browser-based applications to the support of mobile devices. Many developers - and by that I mean software companies of the likes of Microsoft - use HTML5 as the magical answer for all questions related to mobility. “What’s your platform strategy for your mobile apps”? “HTML5”! 

Is it really going to be that easy?

HTML5-based LinkedIn

HTML5 promises many improvements including better handling of video, semantic elements and offline data support - all able to greatly advance the capabilities of web applications. From the user experience standpoint, it allows building sophisticated and appealing web applications - just check out the recently released mobile apps for LinkedIn or Vudu.

One of the greatest challenges in the development of mobile applications is the great variety of operating systems and types the mobile devices that a developer has to support. Even though the list got shorter since the demise of Symbian and webOS, the developers need to consider more than just supporting the top two leaders, iOS and Android, with BlackBerry and Windows Phone 7 duking it out for the 3rd place.

Besides the fact that even the iOS and Android operating systems come in different flavors that may force developers to build multiple versions of their apps (i.e. iPhone vs iPad and the already numerous Android derivatives), the better apps also want to take full advantage of the hardware capabilities of the device. The obvious differences are the screen size and resolution. Going forward, however, the device manufacturers will increasingly compete with each other by adding many more device capabilities.

Already today, some devices have a front facing camera, rear facing camera, keyboard, accelerometer, GPS chip, USB port, memory card slots, and Bluetooth communication. In the near future, we can expect many more capabilities including near field communication (NFC) sensor, proximity sensor, biometric sensor, temperature sensor, and distance meters which are surely important for all golfers, right? The successful apps will have to take advantage of these capabilities and since every device is different, they will need to exist in multiple versions.

Could HMTL5 add support for such hardware features? No, HTML5 is probably not going to fix this problem. It is very unlikely to expect that the HTML5 standard could evolve to cover all such device specific innovations and even if it did, it wouldn’t be able to keep up with the pace of innovation. Yes, there will be successful apps and services that will make it big without using the device-specific hardware capabilities. But many apps will want to take advantage of everything the device has to offer and such apps will need to exist in multiple versions. And the native apps approach will be the only way to build such apps in the foreseeable future.

The Future of Interactive TV Has Arrived

Back in January, I’ve decided to say ‘adios’ to my cable TV provider and “cut the cord”. As I have written about before, being a cord cutter is not that difficult as most of the movie and TV show programming is readily available from alternate sources such as iTunes, Boxee, Hulu, or directly from the TV networks’ sites. Most, except for live sports.

I can live without live sports to a certain degree but that doesn’t stop me from trying to find non-cable solutions. Particularly, I like watching  the Grand Slam tennis tournaments and so I have been pleased to see that the online coverage has been on the rise this year. The current online live streaming coverage from the US Open, however, beats cable hands down.

Internet streaming on the TV screen (photo of my TV set)

The US Open video streaming is offered free of charge, supported by relatively unobtrusive advertising, and delivered by IBM which is not a big surprise since IBM has been sponsoring major sports events this way for years. However, the capabilities of the video stream, which IBM calls the US Open PointStream, go beyond anything we’ve seen in the past.

You chose which match to watch (screenshot)

For example, PointStream streams all matches live and you can interactively select which match you want to watch. Your regular cable TV makes that selection for you and you are not always going to like it since you will inadvertently miss certain matches. On PointStream, you are in charge of deciding which match you want to watch. In fact, if I want to watch two matches at a time, a picture-in-picture feature is available.

Picture-in-picture feature (screenshot)

PointStream goes far beyond that, though. With a mouse click, you can see the score results from all courts where play is under way. You can also see real time statistics and analysis for the match you are watching. IBM is effectively combining the video stream with a business intelligence type of analytics.

Real-time match analysis whenever you want (screenshot)

You can pause the play or rewind it - features we all love from Tivo. You can engage in online chat with other viewers. This particular feature would have been much more useful if it was actually streaming the Twitter conversations related to the #uso11 hashtag, though.

Real-time match statistics a mouse click away (screenshot)

The bad part is that living in Canada, I had to VPN into the US to trick the system into believing that I am a US based viewer. That’s doable and I gladly pay for the VPN service but these artificial borders are infuriating. To watch the action on my big screen TV, I had to connect my iMac with the TV set via a 20 foot-long HDMI cable. That works fine although it is not a very elegant solution. I’d rather had the live TV streaming provided directly via my Apple TV. I hope Apple’s new CEO Tim Cook is already working on it.

Who says you can't watch live sports without cable? (photo)

All in all, I am very impressed by what is possible today. I have an average speed Internet connection at home (8.1 Mbps according to speedtest.net) which gets further degraded by the VPN service (6.72 Mbps) and yet I am able to watch the action just like on TV. And with programming choices and features available, the experience is way better than the traditional TV. Yes, the future of interactive television has started. And I have a message to you, the cable and satellite TV companies - interactive streaming is what I want. Evolve or die!

PS: Rafael Nadal won the match.