A while ago I wrote that I thought Apple’s major failing is not realizing that we’re heading for a post-device world where the devices we use in the future will become a lot like the apps we use today. That is, with a few exceptions, more or less impulse buys rather than painstakingly selected profitable objects.
It seems as though some of this new world is happening faster than I would have thought. In a recent article at VentureBeat, a financial analyst who’s spent a bunch of time in China over the last 10+ years describes his shock at finding fully-capable 7″ Android tablets running Ice Cream Sandwich for sale for $45. They’re apparently called A-Pads.
The truth is that if your company sells hardware today, your business model is essentially over. No one can make money selling hardware when faced with the cold hard truth of a $45 computer that is already shipping in volume.
My contacts in the supply chain tell me they expect these devices to ship 20 million to 40 million units this year. Most of these designs are powered by a processor from a company that is not known outside China — All Winner. As a result, we have heard the tablets referred to as “A-Pads.”
When I show this tablet to people in the industry, they have universally shared my shock. And then they always ask “Who made it?.” My stock answer is “Who cares?” But the truth of it is that I do not know. There was no brand on the box or on the device. I have combed some of the internal documentation and cannot find an answer. This is how far the Shenzhen electronics complex has evolved. The hardware maker literally does not matter. Contract manufacturers can download a reference design from the chip maker and build to suit customer orders.
He goes on to draw the scary, but straightforward conclusion that:
No one can make money selling hardware anymore. The only way to make money with hardware is to sell something else and get consumers to pay for the whole device and experience.
So, companies like Apple can stay around if they can add enough extra things to demand a higher price for their hardware. Apple in particular has an advantage because they have enough money that they actually fund the creation of new fabs in exchange for getting the best hardware before everyone else, but it seems that will likely fade some too. He mentions that product cycles are getting shorter and so competitive advantages like Apple funding fabs are likely to last shorter and shorter times.
As product cycles tighten (and we had quotes for 40-day turnaround times), the supplier with the right technology, available right now will benefit.
It seems to me like the right option is to admit that your hardware business is likely to be undercut in most areas and to instead focus on software and integration and move up the stack to where there’s still real value. That being said, this is exactly the kind of thing that the Innovator’s Dilemma says is nearly impossible for companies to do.
