Wednesday, June 27, 2007

Last Computer financial model - look to the cell phone

    In recent blog entries I’ve been describing how software will be implemented on The Last Computer. I'll get back to that later. But first, some thoughts on how individuals and organizations will pay for their Last Computers.
Convergence of mobile phones with computers

I bought a new cell phone last week. In most respects my new cell phone really is a computer that just so happens to be capable of fitting in my pocket and making phone calls. Over time we can expect what we call a "mobile phone" and what we call a "computer" to merge.

Perhaps this future merged device will take the form of a powerful mobile phone that docks into a keyboard / mouse / monitor when we're at our desks; or perhaps it will look like today's mobile phone but when placed on any flat surface it will project a keyboard and mouse pad onto that surface while projecting a high-density widescreen image against any available wall.

I don't feel safe in predicting the physical model of this converged Last Computer (whether it will be more like today's cell phone, more like today's second-to-last computer, or something completely new), but I can predict its financial model. The Last Computer and its related software and services will most likely be sold in a way very similar to today's cell phones.

I purchase my new cell phone (purchase? my?)

Here's how I bought my cell phone this week. I dropped into a local T-Mobile store. Tried out a few devices. Found one I liked. Played with it. A nice salesman answered some questions. He described a variety of service and payment options. While selling me the phone he cleverly up-sold me on various additional services (text-, time-, data-, and warranty-plans), which I mostly accepted because it was so easy to accept and because each item would appear as only a small increment on my monthly bill (for greater payment simplicity I could have those monthly payments automatically put on my credit card). I paid a few hundred for my phone, and within a few minutes it was mine and it was working and I was happy. The whole thing was so easy and painless.

Contrast this with any time I've bought a personal computer, or been supplied one at work, or upgraded from an old one (see previous blog). For simple ease of process, the cell phone purchasing model is vastly superior to today's computer purchasing model.

Consider another aspect of my recent phone purchase. In the above description I referred twice to that cell phone as if it belonged to me ("my cell phone", "it was mine") but in truth it does not belong to me, it belongs to T-Mobile. I don't own the phone; I am only leasing or renting it. The mobile companies are too clever to say that they'll lease or rent you a phone, instead they make it sound like they'll sell or even give it to you, along with an X-year plan. (We can all truly purchase an unlocked phone, and own that unlocked phone. But that costs a lot more up-front money than a plan. I'm perfectly fine with a plan and the other simple benefits it entails, and most other people are too.)

The Last Computer leasing model

The Last Computer will generally be leased. The terms lease or rent will probably be avoided when communicating with the individual consumer (although may be necessary in corporate situations), and, as with the cell phone, the user will feel as if they own the computer. But it will be some form of leasing and that's how I'll refer to the transaction here.

I don't know what the leasing price will be. In a small sampling of people I've queried, they generally seem satisfied with the idea of paying some small initial amount (let's say $200) to buy a computer and $30 per month for all the benefits described previously in my initial ACME Last Computer post. Over the course of three years (a typical obsolescence period for mid-capability computers) that is $1280, which is typically hundreds more than someone would currently pay for such a computer. If, as I have proposed, the consumer automatically gets upgraded every three years, they will continue to pay $360/year (or $1080 over three years) for the privilege of owning their always-up-to-date computer. (Note that peripherals, such as monitors, may not need upgrading as frequently as central units, resulting in greater savings for the vendors.)

This is a good financial deal for the individual consumer (or corporate user, with some modifications) since it is an easier and less-risky option than paying a large amount up-front for what is a risky purchase. For the computer vendor it is more money collected over the lifetime of that computer—on the face of it, it’s not clear if this $30/month arrangement is a financial win over a direct sale, but (as described in the next section) it does open the door for much more income over the lifetime of the lease (which, hopefully, is the long lifetime of the consumer).

Up-selling to the consumer

Now that the consumer is in the system, and is making easy monthly payments for a computer largely controlled by the seller, there is big potential for selling more goods and services to that consumer, and in ways that are actually good for that consumer:

  • Bundled internet services: A computer is not much good these days without a connection to the internet. What could be more convenient than combining the payment for internet service with the payment for leasing the computer? So it is a natural for the internet service provider (cable, dsl, wimax, etc) to partner (i.e. bundle) with the Last Computer provider. (Does this mean, for example, that Dell should start selling cable services, or Comcast should start selling computers, or that they should partner?) As the market is currently seeing combined providers for internet, phone, music, and movie-delivery, it is expected that these mega-providers should also offer computers as part of the one-price mix.

  • Bundled software and software services: Some predict the day when we will stop paying for software directly and instead all software will be a service (often ad-supported but sometimes as a leased service). I hope they are wrong. The ability to easily purchase and use software via your Last Computer provider can revitalize the ability to sell software (more on this below), with the Last Computer corporation as the retailer earning their cut of the sale.

  • Personalized marketing opportunities: With the Last Computer model, and all of the costumer's data available to the Last Computer provider (whether because of caching, backup, system-query, or because it goes through their pipes) their is opportunity to deliver relevant marketing that suits the needs of the user: be this advertising, coupons, or up-selling of relevant services and software.

  • Perpetual retention (customer lock-in): Because of the ease of remaining in the system, and because there is no longer a need to choose a new computer every few years (since automatic upgrades are part of Last Computer contracts), the consumer is unlikely to leave their Last Computer vendor for another.
The cell-phone leasing model leads to the miracle of small- (if not micro-) payments

It is amazing that on my cell phone I can purchase, download, and install software or other content for as little as 49 cents. 49 cents! (It's so painless and per-purchase cheap that countless kids out there are constantly buying total crap for their phones without a second thought.) When done right, all I need to do is click on "I agree" and the software is downloaded and installed, the small price is added to my monthly phone bill, and the phone company and content authors get paid. It's an amazing accomplishment that should be incorporated into The Last Computer for the benefit of creators and consumers.

I know of no other situation where it makes economic sense to sell anything so cheaply. In the traditional software model, the overhead in billing alone is much more than that 49 cents. Add to that the required packaging, middleman markup, marketing, and so on, and the end-user price on that 49-cent piece of software could easily jump to 49 dollars (which is then high enough that sales are lost due to sticker shock and piracy and open-source free alternatives, which together push the price up even higher or drive the creators out of business). Even a simple on-line purchasing system requires me to fill out credit information (again!), which adds to my reluctance to pay that high price.

Alternatively, there is free, ad-supported software. I believe that the recent trend toward making all computing services free and ad-supported can only go so far (and leads to lesser quality over time), and in many cases is just a stop-gap while some micro-payment model is created. Ideally micro-payments would come down to something like this: "Yes, I implicitly agree to pay the New York Times 1/100 of a penny every time I read one of their well-researched and articulate articles." The cell-phone / Last Computer billing model is not quite there, but it is close. I could easily agree to allow New York Times to add some small fee (25 cents?) to my phone bill during each month that I read some of their articles. And I could easily agree to pay a few cents to dollars, now and then, when I find software I like and its purchase and installation is as simple as "I agree".

The traditional software companies can also win from this Last Computer small-easy-payment purchasing model. A Last Computer owner may be happy to allow Microsoft, for example, to add a couple of dollars to their bill on months when that persons uses Microsoft Office. That person is still free to use Open Office for free if they think it's good enough, or to use Microsoft Office for $2/month (and get the additional Last Computer software installation and support). Again, this is good for the consumer, it's good for the software developer, and of course it's good for any ACME Last Computer corporation who gets a cut of this "sale".

Corporate financing models

Most of what has been said about individual consumers applies to corporate users of Last Computers, but with the corporate IT buffering the technicalities and pricing managed in bundles (and so corporations are more likely to shop around for Last Computer providers every few years). Once again the current cell-phone market is the one to follow, but as it applies to corporate purchasing.

Summary of Last Computer financial model: It's like a cell phone

Buying a Last Computer of tomorrow (with its services, software, features, bundles, and upgrades) will be much like buying a cell phone of today. The consumer will benefit from simplicity and lower buy-in prices. The Last Computer manufacturer will benefit from higher and steadier overall income, improved customer retention, and partnering opportunities. And third parties will benefit from selling to customers, through a Last Computer distribution chain, into a revitalized software and services industry. It will be a win win win.


Anonymous said...

Interesting write-up. I would like to add a little of my view:
Here is my offer of future for the cellphone, computer which may merge and maybe not. What you buy in the future is a services from companies which completely host and manage your personal communication and computing environment. You get 1-n devices designed to fit in your daily life and fulfill your needs for communication, connectivity, content, community etc. Your ID and data are completely independent form the device, which in the mobile use case might just be a fashion object such as sun glasses. The devices allow me to talk, capture, enjoy and share media. Now if I need to p[lay a game I can do this on my mobile or if I want to play a graphic intensive game I go to my console and play a game online. The resources are allocated in the network and I get a perfect gaming experience.

The use case scenario:
All this is provided for me for a monthly services fee plus additional fees for special services such as additional compute power for my gaming, storage for my private library, my video collection etc. Someone may give me the devices for free initially and I pay $XX a month for the services. Advantage for me? If I do not use the service I do not pay. If I use it I pay for it and since this is a highly competitive service environment I pay a very attractive price for the basics. My video collection which represents my life I am spending more but this might be because I am a geek. No more PC not used for a year and completely unusable for applications today, no more mobile which does not support the latest services, no more loss of my data like mobile address book or picture collection, communication history.

The service will do everything for for me without asking. If I start a game he will provide resources with appropriate power and add it to my monthly bill. Since the service has no hidden fees I am feeling comfortable to use it and explore it. I can access my data from every device at any time. I have my digital realm organized for me. Depending on my skills and customer segment I get more or less feature rich service presentation.
The question is: When can I have such a service I would love to buy.

Brent Noorda said...

Lars, your view is appealing. Having a single service, available from multiple devices as-appropriate (which is different from how I usually describe this as if you have a single Last Computer device), sounds good to me. I'm ready to buy into that!

Today, on national iPhone-hysteria day, I could almost envision Apple getting there if they were to tie the at&t accounts with the small and large computers (iphone and mac, respectively), if their iTV can catch on, and if they can figure out how to get gaming into the mix.

Anonymous said...

Good post.