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Thursday, December 11, 2008

Who pays for an unused 3G module in a laptop?

If a laptop with built-in 3G or WiMAX is used, there's some form of services revenue stream that can go towards offsetting the upfront cost of the modem. Whether it's a subsidy, a revenue-share, a bounty paid by the operator, or an extra amount forked over by the user at the time of purchase is largely immaterial.

The service is used, a modem is needed, money is paid by the subscriber (or a 3rd party) for the broadband. There's cash coming in, so in theory at least, everyone should be happy, with a bit of decent negotiation among all the parties.

Now consider another scenario.

A laptop is bought from a retailer or online, with a built in module. But the end user either has no intention of using mobile broadband, or perhaps will just try the free trial period included at the time of purchase. So no money is spent on broadband access.

But someone's had to pay for the module. Either an operator, the OEM, or the end user themselves. And whoever it is (or a combination of them) has wasted perhaps $50-100. The user is unlikely to be wearing the cost directly, especially if they've shopped around for competitively-priced laptops, or configured it online. That cash would go on a higher-spec machine, or stayed in their pocket.

If it's bought through a non-operator channel as a "vanilla" embedded PC, there's no clear way for a particular operator to be involved, as the user could put a choice of SIMs in it. There might be a small payment for a "trial" SIM to be in the box, much like AOL used to put a CD in with PC's back in the 1990s. But I can't see an operator paying for the full cost of the module for the privilege of marketing in this fashion.

Which means that for the modules included in "default" notebook configurations, sold through ordinary channels, the OEM is essentially footing the bill, if it never gets used.

Now according to this piece of research, the gross margin on a high-end notebook ($1300) is about 30%. But Dell's overall gross margin is currently 19%, and references to higher-margin products in the mix in its earnings call referred to things like storage and services rather than notebooks. And Asus has been making 20% gross margins on eeePCs, but they are thought to be falling to 15% - and it has now warned that shipments may be lower than expected.

So for the sake of argument, lets say gross margin is 20% for notebooks. Probably lower on an ultracompetitive netbook, and certainly higher on an Apple Macbook Air.

So on a netbook, the gross margin on the wholesale price is, perhaps, $50. And on a mid-range corporate or consumer notebook, $150.

I'm really not convinced that putting in an extra $50-100 cost of an unwanted, unvalued, unused 3G module is going to make those numbers look very pretty, from a CEO's or investor's eyes. Frankly, even if the wasted cost is $30 it's still not going to make people shrug in indifference.

Now, I wonder why Apple hasn't put any WWAN modules in Macs yet, given their continued targetting of an average 30%+ gross margin?

This is one of the reasons why I'm predicting slow uptake of built-in 3G (and WiMAX) in my new report on Mobile Broadband Computing.

6 comments:

Anonymous said...

Dean,

I agree with you that the uptake will be slower than people predict, but that's nothing new with new technologies.

Won't the laptop OEMs simply create a line of high tier notebooks with embedded cellular modems inside and market them that way with a premium price to at least cover the cost of the modem?

I don't see it as being that complicated, or are you simply arguing that there is a perception that cellular modems will be in every laptop, and that that doesn't make economic sense?

Dean Bubley said...

Hi Anonymous

There certainly seem to be some people suggesting that some/all notebooks will feature embedded modules. Some suggest this is likely within 2-3 years.

My analysis & report basically points out that it will be slower than people think. As you say, that's nothing new, but there always seem to be over-zealous hockey-stick forecasts, and I specialise in trying to bring them back to reality.

I also agree that high-end laptops will be able to absorb the cost sooner, while some low-end ones are being sold through mobile operator channels under new business models.

It's the massmarket in the middle that I think will be slow to adopt WWAN.

Dean

Robrobstation said...

Hmmm, here in South Africa where I live. Playing the role of regular consumer, you can either go and buy a laptop from a local store and fork out a large sum of money once off. Or you can actually buy your laptop with an external modem and data bundle from one of our mobile operators (Vodacom, Cell C, MTN) for a set 24 month contract...

Obviously in the former case, your argument will apply.
But in the latter scenario, it becomes a very attractive offering to the mobile operator, who now only has to worry about one device for the customer.

Their margins aren't so affected if you have a look what they are selling and how much they actually charge per month.

:-)

Michael Mace said...

Good points, Dean.

Speaking as someone who used to work at a computer company, saving even a single dollar in cost is a big deal ($1 * a million notebooks is a million dollars in profit).

You'd only add a 3G module if:

--You believe there's so much high-end customer demand for it that you can charge $70 extra for that $30 module, or

--You're getting a revenue-share from the operator on the notebooks that sign up for service, and you've concluded that the revenue share is large enough to offset the extra cost on the notebooks that don't sign up, or

--It becomes a competitive checkoff item and you have no choice.

If I were building a laptop, I'd be tempted to offer the 3G module in an expansion slot. Make it a last-minute configuration option.

Dean Bubley said...

Rob - absolutely, where the operator is selling the notebook, it makes sense, because the modem will almost always actually be used.

But realistically, what % of laptops can be sold via operators? They have limited retail outlet space, they can't really service the corporate market in the same fashion as a proper reseller, and so on.

I was specifically referring to the more normal scenario of buying from non-operator channels.

Michael - absolutely. That's why I think that notebooks will be "embeddable" but not necessarily "embedded".

Dean

Anonymous said...

I have just bought a notebook with a 3g connection it works well. But I signed no forms and I dont know who the provider is. It just is on the notebook and works fine. Who is paying, to whom, and when can I expect it to stop or will it just work forever.