Microsoft, Google And The Race To The Bottom

Microsoft, Google And The Race To The Bottom

Microsoft and Google are stepping up their efforts to gain market share by encouraging manufacturers to sell large quantities of ultra-cheap phones, tablets and computers. And in an interesting new development, some of those cheap devices won’t suck.

Let’s talk for a minute about the strategy behind the upcoming flood of low-end devices, then look at some examples.

Profits vs. Market Share

The traditional measure of a company’s competitive position has always been market share – the percentage of devices on the market sold by that company. In technology, the equivalent is the percentage of devices on the market running a particular operating system. Best example: Microsoft controlled the personal computing world for a decade because Windows had a 90% market share.

Apple changed the equation when it demonstrated the success of a different business model built on selling relatively small quantities of devices for a high profit on each device. Apple’s share of the smartphone market is less than 15% but that doesn’t change its position as one of the most valuable companies in the world, or the public perception that it is the smartphone leader despite Google’s 85% market share. It’s not going to sell low-end devices. Why should it?

When Microsoft introduced the expensive Surface tablets, it was trying to emulate Apple and gain influence (and profits) by selling high-end flagship devices. If Surface tablets had sold well, approaching iPad levels, it would have been sufficient to establish Microsoft as a competitive force even if Google sold ten times as many cheap Android tablets. Alas, that didn’t happen. Surface tablets barely made a ripple either in sales or in public consciousness.

That leaves Microsoft and Google staring at each other, each one seeking to gain at the expense of the other. Windows still dominates personal computing; Google is relentlessly trying to chip away at that position with cheap Chromebooks. Meanwhile, Android dominates the smartphone market; Microsoft has been slowly, slowly making some progress with cheap Windows Phone 8 devices.

In each case, a movement in market share will create the perception that the market is changing – and perception quickly becomes reality. If people start buying Chromebooks in quantity, they’ll be absorbed into Google’s ecosystem and perhaps never come back to Windows. Similarly, Microsoft believes Windows Phone 8 will speak for itself and sell like gangbusters if it can only get enough people to try it.

The only way to increase market share is to sell huge numbers of devices. That means making devices that are cheap, cheaper than ever before, and targeting China and developing countries where there are large populations buying their first technology devices.

Both companies are launching new initiatives aimed at the low end of the market. The race to the bottom is on in earnest.

Google

The market is being flooded by Chromebooks in the $200-$400 range. A Chromebook is a very limited device. Google is improving Chrome OS slowly to support offline use, multiple users, and a better experience with the clumsy interface, but Chromebooks are still only useful either to people who are immersed in the Google ecosystem, or who have very limited needs for nothing more than web browsing and email. Microsoft’s problem is that a large number of people fit in one of those two categories and they’re finding Chromebooks are an acceptable compromise because of the cheap price. Google has especially been making inroads in the education market.

Expect prices on Chromebooks to continue to drop while Google works on improving the user experience.

Meanwhile, Google’s Android One initiative is potentially a big deal for preserving Android’s market share dominance in smartphones. Google will launch Android One on September 15 in India to improve the Android experience on very low-cost phones in developing markets. There’s no shortage of cheap Android phones already on the market but many of them run antiquated versions of Android or they omit the Google services included with higher-end Android phones. Manufacturers now will be encouraged to make cheap but reasonable quality phones based on Google hardware designs, and use a higher quality version of Android supported by Google that includes Google services.

Microsoft

Microsoft is fighting back.

Nokia had begun to make progress in Europe and developing countries with inexpensive Lumia smartphones like last year’s Lumia 520. This year, it’s the Lumia 530 and 630 that are generating the most Windows Phone 8 sales, again at the bottom of the market.

Windows Phone 8 will not succeed if Microsoft is the only Windows Phone manufacturer, so Microsoft took the drastic step earlier this year of making Windows Phone completely free for manufacturers for any device with a screen under nine inches. That won’t make much difference in the US but many manufacturers overseas have signed up to produce cheap Windows phones that will begin appearing later this year. Microsoft also relaxed the hardware requirements so manufacturers can re-use their Android phone designs with Windows Phone 8 without expensive redesign and retooling costs. HTC is the first company to take advantage of that, offering its well received HTC One M8 hardware in a Windows Phone 8 edition. Manufacturers of cheap Android phones may be tempted to do the same thing, unless Google can hold onto them with the Android One program.

Then there are the ultra-cheap tablets and computers, which is where things will get really interesting.

Microsoft is also offering the full version of Windows 8.1 for free to any manufacturer to use on any device with a screen under nine inches. It has dropped the price for Windows close to zero on low-cost devices with larger screens for manufacturers who want to accept a few compromises – advertising the OS as “Windows 8.1 for Bing,” for example.

Windows 8.1 has been tuned to work acceptably on devices with low-end specs. It can run on Intel’s latest cheap processors and can actually work with only 1Gb of RAM. The experience won’t be great but it won’t be as bad as you might guess.

Here’s an example from the IFA trade show in Berlin this week. Toshiba announced a 7” tablet running the full version of Windows 8.1 that will retail for $119.99, and probably be sold for under a hundred dollars. The Toshiba Encore Mini is bare bones, with a low resolution screen (1024×600), 1Gb of RAM, limited storage, and a low-end Intel Atom processor. But you know what? It might be okay. This might not be a rerun of the horrible netbook days, the machines that were sunk by slow performance. The improvements in Intel processors combined with the tuning done to Windows 8.1 may make the cheap devices perform well enough.

There will be a flood of other 7”, 8” and 9” tablets and hybrid devices built on that free Windows license. Most of them, including the Toshiba, will have a bonus that makes the price even more amazing: a license for Office 365 Personal (normal price $69.99) included with the tablet. That’s a license for a single installation of Office, plus 1Tb of space in OneDrive, included with a device that costs less than a hundred dollars!

(Worth noting: the desktop version of Office will be essentially unusable on a 7” screen, but the Office 365 Personal license will also cover the touchscreen version of Office when it finally arrives early next year.)

But wait! There’s more! Want a cheap laptop? There are a surprising number of laptops and hybrids available now or coming soon starting at $199. Paul Thurrott is testing the $199 Asus Aspire E15, a five-pound, thin laptop with a 15” screen and modest hardware specs. There are several new $249-$299 laptops from Dell, Toshiba, Asus, and Acer already available, and many more are on the way.

The cheap laptops will not be barnburners. They’ll have slow 5400RPM hard drives instead of SSDs. Battery life won’t be stellar. You’ll still have to consider all the reasons I suggested for spending more than a thousand dollars on a new laptop.

But you know what? The cheap ones won’t suck. That’s a new development at the low end. It might even blunt the impact that Google is hoping to have with cheap Chromebooks.

It promises to be an interesting Xmas shopping season.