Saturday, February 27, 2010

Creating an unexpected niche

ASUS Eee PCImage via Wikipedia
Those of you who visit Radio Shack or electronic stores could not have failed to notice a new buzzword: "netbooks". Basically, they are tiny portable computers, with a 9 or 10 inch screen (most laptops are now 15 inch screens) with correspondingly tiny keyboards and everything else, and they cost $200-250, with refurbished ones as low as $125, compared to a decent notebook at $500 or so. When closed, they are not much bigger than some people's portable executio folios in which they keep their Day-Timers (tm) and such.
The problem is they are lowest of the low-end. Even though they are x86 compatible (i.e. it will run Windows, even Vista and the upcoming Windows 7), they run VERY VERY slowly. They are good for netsurfing, word processing, e-mail, basically stuff that doesn't require much computing power.

So why am I telling you all this? Almost all the netbooks now on the market uses Intel's Atom series CPU. However, that was NOT the intended purpose of the CPU. Intel had originally planned them to be used in high-end cellphones, i.e. SmartPhones. However, the netbook was created to fill a niche that didn't exist before, and that is what's important.

Why did the netbook makers choose Atom-series CPUs? Because 1) Atoms CPUs are much cheaper than the Pentium / Core series CPUs, about 75% cheaper. 2) Atom CPUs are VERY frugal on power, less than 10 watts in most cases, giving netbooks phenomenal battery life, and 3) Intel doesn't have an "intermediate" family of CPUs, and neither does anybody else.

It's estimated that the actual cost of making an netbook is no more than $150 (out of which $35-40 goes to Intel for the Atom CPU). With netbooks on the market for $200-250, that's 25-50% profit, unheard-of in the computer segment where the average profit is 3%.

Of course it helps when the price has dropped low enough to make it a "commodity". Retail experts have told us for years that the "impulse buy price threshold", where the "cut off" price for something that one can justify for an impulse buy, is $200-$250, maybe a little higher for really techy gadget. And netbooks have reached that point.

Frankly, not even Intel had seen this coming, because it's basically a MIS-application of Intel's CPU. And often Intel gets blamed for the lack of power in the netbooks. People don't realize that it's not meant for the role it was being used. It's like making a compact pickup do a full-sized pickup's job. You get exactly what you pay for. Fortunately, most people don't need a full-sized pickup in everyday life. So, most people don't "see" the limitation.

Acer, in creating the eee PC, has created a new niche, by recognizing the availability of parts and the capability of their manufacturing, plus the power of "impulse buy price threshold". BY now, Acer has developed this niche to death because everybody else, even Dell and HP, have jumped in (and only after others have developed the niche thoroughly), but presumably they have made a good bundle already, and have already moved onto PREMIUM netbooks (the ones that costs $350 or more) that are closer to capability to "real" notebooks, but still maintain most of the portability and power.

So what's the lesson here? Recognize a market niche, and exploit it before any one else can get in. Acer's eee PC is still the most recognized name in netbooks today. And it's not an accident.

The only problem here is Acer cannot protect this niche they had created, not even for a few months.

There has been "new niche" exploitation before. Chrysler created the minivan way back when. Later, they hit upon the PT Cruiser, a retro-looking compact car that's probably the first 'cross-over', just the right size with good styling. However, they can't protect their success. Within months others joined the minivan craze, and PT cruiser was quickly joined by the Chevy HHR. Chrysler since have not been able to repeat their success, which is part of the reason they are selling out to FIAT of Europe now

The problem with niche-defining is the company has to repeat the success over-and-over, or else it becomes a one-hit-wonder, like a lot of 80's rock-and-roll bands... one song, and they disappear into history. Any one remember Polaroid? Those instant cameras that spit out a square piece of "film" with images that appear right in front of your eye in minutes? They are pretty much dead, as they can't react fast enough to the digital photography market. A lot of bio-tech bio-med firms are also one-hit wonders, but often they would be acquired by larger firms.

One company that has avoided being a one-hit wonder would be HP. HP started as a test equipment maker, and later developed and popularized computer printers by introducing the Deskjet and Laserjet to the world. Nowadays, HP is still famous for their printers, but by merging with Compaq a while back, HP is now neck to neck with Dell in terms of PC market share, forcing Dell to partner with Lexmark to add printers to its product offerings. By continually reinventing itself, HP has stood the test of time.

Another niche-carver is Sony. Sony made its name as an electronics maker, and invented the personal music player business with the "Walkman" personal cassette player. They kept innovating and shrinking the player until it's barely larger than the cassette itself, and when the music industry switched to CDs, they created the Discman. However, they have somehow missed the MP3 wave, and is only now getting back into it, but others have beat them to the game. By merging with Ericcson to make cellphones, they were able to leverage their Walkman brand with the phone business to create a unique multipurpose hybrid.

If you see such a niche-carving company, time it right and get out while you can, unless you have faith in their R&D to come out with even MORE niche-defining products.

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