The iPod Killer, Microsoft’s EU Fine, and Gateway’s ‘Insourcing’ Move

Of all the weeks for me to pick to take a vacation, last week was probably the worst. There was so much going on that my “vacation” became busier than a normal work week.

Microsoft, for one, was the subject of some positive buzz as news bubbled up around its so-called “iPod killer.” On the negative side, it was hit with an historically huge fine by the European Union. In addition to these events, Gateway made a move that may be representative of a growing trend in the technology market and began a plan to reverse outsourcing of its support services.

Making an iPod Killer

What would it take to “kill” the iPod? Some of the details came to light last week, but still left open is the question of what it would take to usurp the iPod’s dominance.

To “kill” a product, you have to remove the demand for it — or, in this case, reduce that demand enough so that it isn’t the dominant product in the segment. Previous products that once had the iconic stature that the iPod has now were the Sony Walkman, the Palm Pilot, and, in the gaming space, the original Atari, Nintendo and Playstation consoles.

The Walkman dropped off because other products in the same segment became good enough to compete. With the market saturated, interest in the category faded. The Palm Pilot followed a similar path; Palm still leads the segment but it’s one that is no longer as interesting as it once was and is clearly in decline. In the game segment, Atari burned out and Nintendo was bruised by the competition. Interestingly, it is widely believed that Sony’s Playstation will fall this year, but the core cause is expected to be Blu-ray disc technology and not the strong competitive offerings from either Nintendo or Microsoft.

Sony’s successful attack on Nintendo appears to be the closest we have to a successful model to follow where the segment survives but with a new iconic leader. In effect, Playstation killed the Nintendo 64. However, even in that case, Sony was helped by the fact that Nintendo was transitioning to a new platform and was having a huge problem getting games out in a timely manner. As a result, it became vulnerable.

Determining Vulnerability

So, the first question is, is Apple vulnerable? Maybe. Apple has dropped Portal Player as the technology core for iPod going forward and that means the company should be exposed as it transitions. Potential damage from this, however, doesn’t reach the potential of what not having content would do. There is little danger of that happening, though, because Apple should be able to use the same digital rights management system it has been using. It may result, however, in product delays — which are already rumored — as the company fine-tunes its new technology.

Apple’s real vulnerability comes from its inability to do subscription pricing. The firm is effectively using the same method it used to discredit flash players early on to discredit subscription pricing — that is, arguing that nobody wants it. The fact is, the market has always preferred subscription over pay-for-play plans in everything from movies, to data, to cable TV and cell phone services. Now, it took awhile for someone to do it right, but MTV’s Urge, which automatically creates playlists for you, appears to have done it right — and Apple’s exposure will increase as users realize this model, which they are familiar with through their cell phones and cable services, provides the best value.

Still, we have products like the SanDisk Sensa and Toshiba Gigabeat that are arguably better than their iPod counterparts today and will work with subscription music services and, so far, Apple has not yet been heavily impacted. This suggests something more will be required; something that makes the iPod as it currently exists redundant, or, in other words, changes the category enough — as smartphones are doing to PDAs — so that iPods can’t compete.

There are two vectors of attack that could do this. The first is phones. If a phone can be developed that provides an iPod-like experience without penalty, then the iPod becomes redundant along with the entire standalone MP3 player category. It should be noted that Apple’s effort, the ROKR from Motorola, didn’t meet this standard. Phones that come close either carry the Sony Walkman brand or run Microsoft’s embedded OS for phones.

The other vector is gaming. This one is particularly dangerous for Apple because the firm has no resources readily available to respond to this threat. Casual gaming is on the rise, and the Sony PSP and Nintendo DS have already both done reasonably well in this area. Given that the Microsoft group that is building the “iPod killer” is led by an ex-Xbox guy, there clearly is a reason for Apple to be concerned. Adding to this concern is that while Microsoft generally has demonstrated poor marketing competence, particularly when compared to Apple, the Xbox group has not. We could be at the front end of what may be the end of the MP3 market as we know it.

Microsoft vs. the EU

On another subject, the EU hit Microsoft with an historic US$356 million fine last week for noncompliance with a mandate to disclose technology documents. This is a good lesson on why getting on the wrong side of a government entity is a bad thing. The major issue here is Microsoft’s assertion that the order from the EU was unclear. Governments are known to present information at times that may be a little unclear. However, the core of the directive did seem clear with wording that stated that the EU wanted Microsoft to produce “complete and accurate technical specifications.”

Having worked in this industry for a couple of decades now, personally I’d like to see any vendor, open source or not, produce truly “complete and accurate technical specifications.” Anyone who has ever received a part, a piece of software, or complicated child’s toy knows that “complete and accurate technical specifications” are a myth. Still, Microsoft agreed to provide them and for the last two years has been trying to understand what the heck they are.

Microsoft submitted something like 10,000 pages of technical documents, which is consistent with what I would expect from any technology vendor who got an order like this. An independent monitor, computer science professor Neil Barrett, was brought in and, evidently, brought some sanity to the process, asking for improvements to make the information more useful. He provided specifics on what he wanted and Microsoft went back and started over again.

Had it been up to me, I would have asked Barrett to recommend someone he trusted to come in and help with this process to reduce the iterations that were likely to follow, but that is not what happened. Improvement became a gradual process. People who had been doing something one way, and a really ineffective way at that, had to relearn — and that is always a long process.

Even though it appears that Microsoft was making a good faith effort, the EU clearly ran out of patience. Governments are like that. Given the entity is a commission and not a court, however, Microsoft’s chances for appeal are reasonably good.

The good news is that we should have, at the end of this, a solid template for “complete and accurate technical specifications” and if that results in a much higher standard for everyone to follow a lot of good will come from this. (I’d love to see the face of the IBM executive who realizes he’s got to comply with this very same standard when the EU asks him to supply complete documentation someday.) Apple may very well be the next major company to head down a similar legal path in Europe, so it should be watching this process very closely.

Gateway In-Sources

Finally, Gateway announced the good news last week that it plans to staff a call center in the U.S. to address U.S. customer needs, first for its business clients and later for its consumer clients as well. The idea that people who perform support can be located anyplace in the world, at least in my mind, was the result of mixing up what you can do with electronic and human resources. Machines can, if you allow for latency, be placed anyplace — but people with widely divergent backgrounds often don’t communicate well, even if they seem to speak the same language.

Stories about vendors inside and outside of the tech segment that have collapsed their customer satisfaction figures as a result of outsourcing have been far from uncommon. I’ve been expecting a reversal of this trend for some time. This change by Gateway, which indicates that firms need to take a hard look at their internal practices, should go a long way to improving the company’s customer satisfaction scores in the U.S. — and provide a template for others to follow as well.

So, during my week “off,” we heard about a cool new toy, better industry documentation, and better customer support. Was that a great week or what?