The $199 Surface for Windows RT tablet--why the rumors might need to be true

There are legions of reports, starting with Engadget, that Microsoft may price its entry-level Surface for Windows RT tablet at $199. The reports tend to fall into three categories:

1. Microsoft would never do that to its licensees, 
2. It would be awful for its licensees if Microsoft did it, and
3. Microsoft can afford to do it.

In a sense, all three are true: Under normal circumstances, the last thing that Microsoft would want to do is to compete with its hardware licensees. If Microsoft did it, its (four, count 'em, four) Windows RT licensees would undoubtedly be hurt--there's no way that Asus, Dell, Lenovo and Samsung could, or would, match that price. And yes, Microsoft can afford it--and it has a history of deficit-spending its way into markets. It's estimated that the company lost several billion dollars on its Xbox game console business before it became profitable, and the company recently took a $6 billion write-off on its acquisition of online advertising company aQuantive. The company has also lost billions of dollars on its online business, although it's still nowhere near profitability after years of investments.

I fall into a fourth camp: Microsoft has to do it, for the same reason that the company rushed out its Surface tablets with a last-minute, under-rehearsed announcement that didn't include any price or availability details. My premise is that developers simply aren't showing much interest in creating apps for the tablet user interface formerly called Metro. Microsoft knows better than anyone else whether developers are showing interest in Metro--they know how many developers are using Visual Studio to create apps, and at least roughly, how many apps are under development.

Microsoft also knows that the biggest strength of the iOS platform is its enormous collection of apps, and that Android struggled as a tablet platform because of a lack of apps. Without a strong assortment of apps, and with no price advantage over the iPad and Android, Windows RT will be "dead on arrival." Microsoft has probably already resigned itself to having a big "app gap" when Windows RT ships, so it has to come up with another motivation to get consumers to buy Windows RT tablets, and thus build an attractive market for app developers. That motivation is price.

Microsoft's big lesson may be HP's experience with the webOS TouchPad. At $399, TouchPads gathered dust at Best Buy stores around the U.S. However, when HP dropped the price to $99, hundreds of thousands of the tablets flew off the shelves, even though they were discontinued and HP's commitment to further webOS development was in serious doubt. Demand was so great that HP built more of the tablets, and those that are still available sell at prices close to the original retail price.

Microsoft has to get a lot of Windows RT tablets into consumers' hands in order to encourage developers to write for the platform. If the company believed that the tablets under development by its licensees wouldn't be popular enough to make much of a difference, it had to act--first with the Surface pre-announcement, and now, with a $199 price that will be too good for a lot of people to pass up.

I go back to my point above--Microsoft isn't afraid of taking big losses in order to buy its way into a market. It's also not afraid to lose money on hardware--estimates of Microsoft's costs for replacing Xbox 360 game consoles with the "Red Ring of Death" problem range as high as $2.5 billion. So, while selling the Surface for Windows RT below cost would certainly be an act of desperation, it's already in Microsoft's play book.

Best Buy: Another example of the "self-inflicted wounds" rule

Forbes.com has an op-ed post about Best Buy. It centers around a case of horrible customer service that the writer and his friend experienced a few days ago at a store in the San Francisco Bay area. They wanted to buy a copy of the Blu-Ray version of "How to Train Your Dragon", which is a Best Buy exclusive (when will the movie studios stop giving exclusives on hot titles to retailers and consumer electronics companies?). Best Buy's website said that the movie was back-ordered online but was in stock at a local store. They went to the store, only to find that the movie was out-of-stock. They weren't offered a rain check or even an apology. When the men shopped for another Blu-Ray disc at the store, an unkempt salesperson came over and tried to sell them a television service (they never found out exactly what he was selling). They finally found a movie to buy, only to realize when they got home that, with all the irritation, they'd picked up the wrong one. When they came back to return the unopened disc, they were told that all software sales are final and were refused a refund.

Just about everyone I know who shops at Best Buy has a customer service horror story. Last year, I went there to buy a point-and-shoot camera. They had the model I wanted on display, but when I told a salesperson that I wanted to buy one, he told me that it was out of stock. He said that another store had it, and that they would ship it to his store, and I could come back in a day or two and pick it up. I told him that if I had to drive back to his store in a day or two, I could just as easily drive to the store that had it and buy it that day, or go online and have Best Buy ship it directly to my home. The salesperson insisted that I have the camera shipped to his store for pickup, most likely so that he could get credit for the sale, and I left without buying anything.

Shortly before Christmas, Best Buy told an unknown number of customers that it couldn't fulfill their online orders for products, some of which had been placed as early as Thanksgiving. Best Buy refuses to reveal the number of customers affected, or which products were involved. After Christmas, the company sent an email to its regular customers with a video from company CEO Brian Dunn. In the video, he thanked customers for their business and said that things would be "even better" in 2012. He didn't apologize for the holiday order snafu. Just a single sentence, such as "We're committed to improving customer service online and in our stores" would have indicated that top management is willing to admit that the company has customer service problems. Instead, the impression left was that Dunn and his team are in denial.

Most businesses that fail do so because of self-inflicted wounds, rather than competitors or the economy. Circuit City brought on its own failure, through a combination of poor locations, confusing store layouts, skimpy product selection and lousy customer service. Best Buy has a perfect example of what not to do from Circuit City's example, but it's going down the same path.

The best thing that the company could do is to close the stores that it plans to close in 2012 quickly, and then focus 100% on improving customer service:

• Improve employee training.
• Encourage good employees to stay with pay and benefits; don't repeat the mistakes that the company made in 2007, when it fired 3,400 of its most experienced (and highest paid) salespeople, replacing them with cheaper new hires, and in 2009, when it demoted as many as 8,000 senior sales associates to regular sales positions, with 25% to 50% pay cuts.
• Get rid of the third-party salespeople, or at least force them to stay at their stations (I was shopping for a laptop at Best Buy a couple of months ago, and a third-party Comcast salesperson came over and tried to sell me a Comcast subscription. I suspect that the person who interrupted the writer of the Forbes.com article was a third-party salesperson.)
• Implement whatever systems are necessary to avoid a repetition of the pre-Christmas order cancellations.
• Improve the accuracy of inventory counts on the Best Buy website, so that customers aren't told that products are in stock in stores when they're actually sold out.

The good news is that Best Buy has time to turn itself around, but it first has to acknowledge that it has a real customer service problem.

The "Connected Store" and the future of retailing

Intel and a number of partners, including Adidas, Procter & Gamble, Best Buy, Kraft Foods and the MIT Media Lab, are showcasing a two-story, 2,400 square foot "Connected Store" at this week's National Retail Federation Convention in New York. Intel is using large flat-panel, touch-sensitive displays to showcase how its processors can be used to improve the retail "experience".

The Adidas demonstration uses three displays to showcase Adidas' entire shoe line. Shoes that aren't in stock can be delivered to the store for pickup or directly to the customer's home within 48 hours. The Best Buy demo, built in conjunction with MIT's Media Lab, enables customers to get a demonstration of any product on any vertical surface in the store.

These demonstrations go far beyond the digital signage systems found in many retail stores, in that consumers can interact with them instead of simply passively watching them. These systems could help drive a trend to downsize retail locations. For decades in the U.S., there's been a proliferation of "big box" stores, led by Walmart, Target, Costco and Best Buy. The problem is that real estate is leased based on square feet, and bigger stores means higher real estate costs, as well as higher costs for utilities and more employees needed to staff the physical space.

The "big box" cost problem is very clear at Borders and Barnes & Noble. They've built bigger and bigger bookstores, even as print book sales have declined. Many consumers still like to look at physical books in bookstores, but they then go home and purchase them online as eBooks. Bookstores can recreate the "books on bookshelves" experience using much less floor space with big-screen touch-sensitive displays. Consumers can open "books", page through them, and make a purchase decision right there. eBooks can be sent to their portable devices for immediate download, and the sale is made by the retailer, not by Amazon or another competitor.

These systems will also enable consumer electronics retailers to shrink their stores. They can keep the most popular products in stock in the stores for immediate delivery, yet let consumers interact with and order the same assortment of products that they already carry on their websites. One might argue that consumers can do that already from home on their personal computers and tablets, but closing the sale in the store means that those customers won't compare prices with other online merchants and buy at the lowest price.

In short, the era of the "big box" store isn't over, but "little box" stores enhanced with interactive digital technologies will take their place in many markets and segments.

U.S. holiday buyers are avoiding high-end consumer electronics

Yesterday, the price of Best Buy's stock plunged on the company's report of lower year-to-year sales for its fiscal Q3, and expected lower sales for the entire year. Analysts said that Best Buy poorly merchandised its "Black Friday" deals, while the company said that it deliberately decided not to offer the "third tier" (their term) consumer electronic brands and deals that Walmart and Target offered.

Even though the U.S. Commerce Department reported that overall retail sales rose 0.8% in November, consumers were much smarter about their Black Friday purchases this year. Historically, retailers have offered a limited number of low-priced products on Black Friday, expecting customers who find the product they want to be sold out to buy more expensive (and profitable) products. This year, consumers either walked out without buying anything if the bargain they were looking for was sold out, or put so much pressure on store management that they were allowed to purchase more expensive products at the price of the sold-out models.

At the same time, ECN Magazine is reporting that consumers are avoiding 3D and Internet-enabled HDTVs. The article quotes a fund investor who questions the logic of CE companies pushing expensive new 3D HDTVs just a year or two after most people purchased their first big-screen HDTVs. Consumers don't see the value proposition, especially in a still-fragile econony. In addition, consumers are put off by the requirement to purchase expensive 3D glasses for every person who wants to watch. There's also a dearth of 3D content, and consumers are afraid of becoming nauseated or getting headaches if they watch 3D.

In addition, consumers are avoiding Internet-enabled HDTVs if they're priced significantly higher than comparable non-networked devices. They realize that they can add Internet connectivity by purchasing an Apple TV or an Internet-enabled Blu-Ray player (some of which are available for under $100). They're also comparing the prices of those products with Google TV-enabled devices, and are going with the less-expensive products. As with 3D, they don't get Google TV's value proposition and can't justify the higher price.

What does it all mean? 3D HDTV won't really take off until an economical, reliable system that doesn't require glasses is available--which is what the CE industry should have waited for in the first place. As for Google TV, it may already be dead, but it certainly won't take off until the price is $99 or less. Google and its partners had no good reason to rush the products, which were clearly half-baked, into the market so soon. By the time they fix their many problems, consumers will have moved on.

Roku to license its platform: The low-cost alternative to Google TV?

Engadget reports that Roku has begun licensing its hardware and software to consumer electronics companies. Its first licensee, Netgear, essentially repackaged the new Roku XD and is selling it at Best Buy, Radio Shack and Fry's. To date, Roku's market penetration has been limited by its distribution--prior to the Netgear deal, the only way to purchase a Roku set-top box was to buy it from Amazon or direct from Roku.

If you're a consumer electronics manufacturer, you can license the Google TV platform for free, but the hardware necessary to make it work is expensive: Consider that the least expensive Roku box sells for $59.99, while the Logitech Revue Google TV-compatible STB retails for $299.99. Even with a substantial licensing fee to Roku, consumer electronics manufacturers could add Roku capabilities to their HDTVs or Blu-Ray players for a fraction of the cost of the Google TV architecture. Shaving a few cents off the manufacturing cost of a product can make a big profit difference, and a Roku-based device has the potential to be much more profitable than one based on Google TV.

Even for manufacturers like Vizio who have developed their own Internet video capabilities, it may make sense to license the Roku platform and take advantage of its off-the-shelf ability to access Netflix, Amazon Video-on-Demand, Hulu Plus, Pandora, Major League Baseball, Vimeo, Sirius XM and many other content providers. Negotiating deals with content providers takes time and money, and licensing the Roku platform would allow these manufacturers to focus on manufacturing and marketing, not content acquisition.

Could Roku end up in as many devices as Netflix currently does? It's a real possibility.

Apple's iPad goes mass market

Last week, Bernstein Research announced that the iPad has become the fastest-selling consumer electronics product in history, and an analyst from Ticonderoga Securities who spoke with one of Apple's component suppliers said that the company is gearing up to sell 45 million iPads worldwide next year. Apple's putting in place a distribution channel that will be able to sell that many iPads. By the end of this month, Apple will have at least tripled the number of stores selling the iPad in the U.S. since it was first launched earlier this year, and one of the new distribution deals is a harbinger of much bigger deals to come:

• Starting today, iPads will be on sale at Wal-Mart and its sister warehouse store chain Sam's Club, both in-store and online (although online customers will have to go to their local Wal-Mart or Sam's Club to take delivery)
• Target, Wal-Mart's biggest competitor, started selling iPads earlier this month
• Best Buy, the largest consumer electronics retailer in the U.S., started selling iPads a few months ago
• AT&T will begin selling iPads in its stores by the end of the month, and will offer services to help businesses develop their own iPad apps and integrate iPads into their operations
• Perhaps the most important news is that Verizon will also start selling iPads in its stores by the end of October, but with an interesting twist. Apple doesn't have CDMA-compatible iPads avalable (CDMA is the mobile standard that Verizon and Sprint use), so Verizon will sell WiFi-only iPads in a bundle with its MiFi mobile hotspots, at exactly the same price as the equivalent 3G GSM iPads already on sale. Like AT&T, Verizon will offer the iPad/MiFi bundle contract-free; users can sign up for wireless data service on a month-to-month basis, at rates that are the same or better than AT&T's. The Verizon bundle is even more flexible because the bundled MiFi can be used as a WiFi hotspot for other devices as well.

Verizon's iPad/MiFi bundle is clearly an interim solution until Apple can start delivering a CDMA-compatible version of the iPad. More importantly, this announcement means that the rumors of a forthcoming Verizon iPhone are almost certainly true. Apple's January announcement is going to be extremely interesting.

Radio Shack to operate mobile centers within Target stores

Earlier today, Target announced that it will partner with Radio Shack to open Target Mobile centers within 850 of Target's stores in the U.S. by the end of this year and virtually all Target stores by the end of next year. This is a direct move to counter the increased emphasis on mobile at Best Buy and Wal-Mart. In particular, it looks very similar to Best Buy's partnership with Carphone Warehouse, the U.K.'s largest independent mobile phone retailer. In order to increase its mobile retailing expertise, Best Buy acquired 50% of Carphone Warehouse in 2008, and the two companies together developed the Best Buy Mobile centers that are now located in all Best Buy stores, as well as 77 free-standing Best Buy Mobile stores.

Radio Shack has been rumored to be in play for acquisition, but it seems very unlikely that Target would partner so closely with a company that might be purchased by a competitor. Therefore, it's likely that Target is in the running to acquire part or all of Radio Shack. If the in-store Target Mobile centers are successful, this could lead to some Radio Shack stores being rebranded as Target Mobile stores.

The independent filmmaker's paradox

Several years ago, I ran a DVD distribution business. I didn't do a very good job, but sometimes you learn more from your failures than your successes. We were looking to license the home video distribution rights for a number of feature films, and worked with a company in Los Angeles that keeps track of all the independent films that are in production or completed and are looking for distribution. This was a few years ago, but there were more than 4,000 independent films produced each year without committed distribution deals. That's an enormous number by any measure. According to the Motion Picture Association of America, there were 610 movies released in the U.S in 2008. That's about the capacity of the U.S. theatrical exhibition system; they could of course show more films, but it probably wouldn't be profitable for either the exhibitors or the distributors.

Home video used to be a good outlet for a lot of titles that couldn't find theatrical distribution, but independent movie rental stores are all but dead, Blockbuster is "circling the drain", and the other leading rental chains are nearing, in or just existing bankruptcy. Home video is being driven by Netflix and Redbox; Netflix with a huge selection, and Redbox with a very small selection but low rental prices. DVD sales have dropped off due to the economy, and Blu-Ray is nowhere near picking up the slack. The big-box retailers like Wal-Mart and Best Buy no longer discount the new releases as heavily as they once did, slowing sales even further.

For an independent movie producer, the "conventional" outlets are becoming less and less viable. When shelf space is determined by how many discs can fit into a vending machine, the chances for small feature films to get distribution, let alone get noticed, drop to almost zero.

The Internet is seen by many as the savior of independent film, but that's where the filmmaker's paradox kicks in. You can produce and edit a movie today for less money than ever before. Distribution via the Internet is less expensive and more democratic than any method ever available to filmmakers. However, there's very little chance of making enough money from the Internet to cover the production costs of even a small independent film. So, even though it costs less to independently produce and distribute a movie than it ever did, it's no easier to turn a profit.

For decades, independent film financing has relied on an ever-changing assortment of starstruck investors, government agencies offering tax breaks and the families of filmmakers who want to help them make their dreams come true. Every year, there's a new set of players: One year there's money from South Korea, and the next year Germany becomes the big player. Canada and Louisiana compete to see which one can offer the most tax subsidies and the lowest overall production costs. Nothing, however, changes the fact that independent film funding is a sucker's game for the vast majority of investors. Subsidies allow you to save money, but you usually have to make some in order to get the benefits.

So what's the solution? It's attitudinal rather than structural. The Internet is not going to change into a profitable distribution channel any time soon. If you're making an independent film with the intention of making money, you're very likely to be disappointed. In you invest in an independent film with any expectation of making a return on your investment, you're also likely to be disappointed. The trick is to make and invest in independent films with no expectation of getting your money back. Make them because you want to tell a story, because you deeply believe in a subject, or you just want to pal around with actors and directors you admire. Take advantage of the lower costs of production and distribution to make films that otherwise would never have been made.

It's the predictions time of the year, and some are better than others

The holiday season is wonderful, but it's also the time where bloggers, editors, pundits, psychics and all of us slightly- to completely-uninformed people issue predictions about what is going to happen in 2010. I just read a few of the predictions for 2010 from Danny King of Video Business, and I had a few, uh, disagreements.

Image via Wikipedia

Image via CrunchBase

For example, King thinks that it's a foregone conclusion that Amazon will buy Roku. Not very likely, given that the Roku set-top box was designed by Netflix and was originally supposed to be a Netflix-branded product. I'm sure that Netflix still has first dibs on the product, and perhaps on Roku itself. He also predicts that Tivo will be sold to Best Buy. Huh? Tivo is turning into an audience- and advertising-research company; Tivo's DVR sales and market share continue to decline, and Best Buy buying the company wouldn't change that. I think that both companies will end 2010 as independent entities, but if I had to come up with likely purchasers, I'd vote for Cisco for Roku and Google for Tivo.

Image by Getty Images via Daylife

He also thinks that Redbox will do a deal with Starbucks, but only if they come up with kiosks that do digital downloads (to thumbdrives or SD cards, I presume.) Starbucks tried it with music and it didn't work, so why would they think that it would work any better with video? My personal opinion is that the digital download kiosk model being pursued by Blockbuster and MOD Systems will be dead on arrival. Why would I drive to Starbucks to load a video onto a thumbdrive when I can download it over the Internet to my PC or stream it to my Netflix- or Amazon-equipped set-top box or Blu-Ray player?

Another of his predictions is that NCR will drop out of the video kiosk market, just after the company acquired DVDPlay; his logic is that NCR is number one in ATMs and doesn't want to be number two in video kiosks. True, they don't want to be number two--that's why they purchased DVDPlay and partnered with Blockbuster. There is certainly room for more than one company in the video kiosk business, and I think that NCR will stay in.

I've learned not to make end-of-the-year predictions, because too much can happen too quickly to anticipate. I will state a hope for 2010, however, and that is that the economy recovers, so that the millions of people without jobs can find work, and the millions who are underemployed can find full-time work and better opportunities. I hope that you have a happy holiday season and a healthy, loving and comfortable 2010 for you and your family.

Is Best Buy becoming the place to get mobile phones?

In mid-August, Best Buy and Apple announced that Best Buy would sell the 3G iPhone, starting September 7th. Now, The Boy Genius Report says that Best Buy will also get the Palm Treo Pro, RIM BlackBerry Pearl Flip 8220 and T-Mobile G1. Last May, Best Buy invested more than $2 billion to buy 50% of the Carphone Warehouse, the biggest seller of mobile phones in Europe. Go to any High Street (shopping area) in the UK, and you'll see one or more Carphone Warehouse stores there. They compete successfully with mobile operator-owned stores across Europe. Best Buy is tapping into the merchandising knowledge of Carphone Warehouse (with which it has had a joint marketing venture since 2006) to expand its mobile presence in the U.S., and it seems to be succeeding in its goal to become the place to go for hot new phones.