CES Countdown #6: Can the PC adapt to the commodity business model?

Could PCs become subsidized like smartphones?

Easily the most successful example of the commodity business model in play worldwide involves smartphones. Manufacturers such as Apple are willing to knock several hundred dollars off their up-front prices, so long as carriers such as AT&T in the US, Rogers Wireless in Canada, and O2 in the UK can be trusted to give Apple a cut of their long-term contracts.

Last month, netbook manufacturer Acer experimented with applying this same concept to its Aspire One, with a limited-time sale through Radio Shack that dropped its sticker price of as much as $500 down to $99, if customers signed up for a two-year contract with AT&T for 3G service. The general success of that experiment is not yet known. Is there any possibility that such a concept could apply to notebook PCs in general, which after all bear little technological distinction from their netbook cousins?

Not really, believes NPD's Ross Rubin: "As more mobile devices, netbooks are a more suitable candidate to tie to wireless data plans because it is more likely that users will need such a plan to take full advantage of them," Rubin told BetaNews. "Larger notebooks are more likely to stay at home where they will feed off Wi-Fi. One can take this argument to the extreme by asking why carriers wouldn't subsidize desktops. In fact, some dial-up ISPs such as AOL and MSN tried that model years ago and were ultimately unsuccessful."

The other problem, Levy points out, is that notebook PCs themselves are no longer out of reach for most consumers. Despite the economic downturn, 2008 was a boon year for notebooks, and the first year on record in which desktop PC sales declined below notebooks. In fact, prices are descending low enough where analysts are already considering them to be "commoditized."

"The price of the hardware has already been commoditized to the point that consumers, wary of yet another monthly bill, would rather just buy the device outright and avoid being tethered to the provider," Carmi Levy told us. "The challenge that providers face in trying to convince consumers otherwise is that the value proposition for a services-based netbook, laptop, or similar PC-class device is just as compelling now as it was for $1,500 cell phone 25 years ago. This is proving somewhat difficult to accomplish as the market has already gotten used to $400 laptops with no strings attached, and consumers are experiencing subscription fatigue."

Ross Rubin agrees with that sentiment: "In the real world, consumers have a limited number of relationships that they want to maintain. Service providers need scale, a hook into a highly-valued service that enables them to leverage multiple services in a portfolio that can take advantage of new service offerings or at least offer a dazzling 'value pile' as we're seeing the wireless operators now pursue pitting their $100 'unlimited' plans against each other. AT&T and Verizon have been moving toward tighter integration with the mothership while Sprint has long been cozy with the largest cable providers. Computing services such as online backup, though, are just not big enough yet where see a significant opportunity."

"A $400 laptop with no strings attached is preferable to a $400 laptop that comes with an unlimited WiMAX subscription," Levy added. "Even if that laptop would normally sell for $1,200, the fact that consumers would have to shell out $400 on top of the ongoing subscription fee keeps them from actively buying into the concept."

If the value proposition for subscription PC service didn't stand up on its own, could someone such as Sprint -- as Rubin suggested -- be in a prime position to buffer it as part of a "quintuple-play" option, along with WiMAX, wireless, landline, and home TV service? Maybe, he feels, but only if you don't mind someone else possibly crashing the party: specifically, the government. "For some time some operators have been thinking of their businesses in terms of a 'five-play' -- adding security or breaking out IP video from RF video to add a fifth service to the quadruple-play. Regulatory action, though, is far from guaranteed and dependent on the nature of the business. Traditional long-distance is seeing strong competition from VoIP and the telcos are battling back with fiber getting into the video space, joining the satellite TV providers. And even though we've seen much consolidation among wireless carriers, there is still choice for basic voice and data, with expanding choices for content as the operators open up more."

"The regulatory implications of relatively few carriers controlling virtually all of our means of connecting with the outside world are onerous for consumers," AR Communications' Carmi Levy puts it. "Already the landscape is defined by consumer bitterness about contractual lock-in, impossibly complex fine print, customer support that aggravates more than it supports, and price gouging and growth that no one seems willing or able to control. "The idealist in me would like to believe that real competition -- possibly encouraged by legislative action -- might make room for creative players to enter the market and provide the kind of relief that consumers have long craved. The realist in me, however, recognizes that governments at all levels are so patently incapable of understanding the implications of today's evolving technology market that even if they had the will, they wouldn't be able to change much of anything," continues Levy. "Government has always lagged the evolution of technology -- witness the patent system mess in the Internet Age, where a system built well over a century ago struggles to cope with the ever accelerating and evolving tech market."

The other danger in leveraging the help of carriers, at least in the US, is that FCC guidelines could make any services they provide, along with the devices that provide them, covered not by laws governing software and the Internet, but instead by the Communications Act of 1934. That law would likely prohibit a monopoly player. Thus theoretically, if Microsoft made Windows into a communications service by offering it with a device subsidized by carriers, it would have to make provisions for alternatives in the same way that carriers have to make room for one another on their respective pipelines, by law.

It may therefore become impossible -- for legal, logistical, technological, economic, marketing, and historical reasons -- for the entire personal computing package to ever be offered to consumers under a pay-as-you-go system. That may not be bad at all for the consumer in the end -- in fact, cheap computers with low-cost operating systems and a la carte software may actually be more desirable. But it encloses Microsoft and some of its competitors in a trap of their own making, where over time, they must step up their efforts to make well-defined value propositions, for products to which consumers continually attribute less and less monetary value.

The channel for revenue from the computing industry is getting tighter, and if computing cannot evolve into a utility-like commodity, then it may have to evolve into something else. This is a very serious problem, which could erupt into a catastrophic business position for software makers within the next five years, unless they take decisive steps today to begin redefining their role in the consumer economy, and altering their often negative perception in the public consciousness. It will be a long and difficult road ahead, and those who find themselves traveling on it may find themselves hoping that Bill Gates was wrong.