Is there a point of diminishing return on improving fuel economy?

Ok, I know this is mostly an information technology blog (although when I started it my intent was to cover technology in general) but I want to talk about automotive technology right now.  As I do with IT topics I like to look at things with a bit of an economic slant.  Not a deep detailed analysis, but the kind of back-of-the-envelope analysis that can be used as a gut check on products, markets, etc.  And it turns out that the current relentless push for better fuel economy is a perfect place to do this.

To begin with I’m not going to address any environmental issues here for a very practical reason.  The overwhelming majority of car buyers do not actually buy based on the environmental impact of the vehicle they choose.  It is a secondary driver of their behavior, not a primary driver.

I have friends, family and acquaintances who are incredibly vocal about the problem of Global Warming/Climate Change, but if you look at what they drive they are not attempting to dramatically minimize their own contribution to this equation.  People’s real buying behavior is to first decide on a class of vehicle that meets their needs, then they narrow the choices down to those they can afford, then decide what subset of those they like, and only as part of that process do they really start to consider things like environmental impact.  And they mostly do that (in the U.S.) through the economics of Environmental Protection Agency’s (EPA) Miles-Per-Gallon (MPG) ratings.  So the better the EPA rating the less fuel consumed (and paid for) and the less carbon emitted.   No matter your position on Global Warming/Climate Change you win if you use less energy.  Everyone wins actually, even the energy companies.  Although an argument for that position is not in the scope of this blog.

A discussion of the EPA’s benchmark methodology, and EPA MPG ratings are indeed a metric derived from a benchmark, is in scope for this blog and at some point I’ll write about it in the context of benchmarking in general.  But not today.  Today we focus on MPG economics.

By 2025 the U.S. is supposed to have a Corporate Average Fuel Economy (CAFE) of 54.5 MPG.  That is a rather artificial metric used by the National Highway Traffic Safety Administration (NHTSA).  I’ve seen articles claiming this will equate to an average EPA sticker of 36 MPG and others claiming low 40s.  Different benchmarks.  Moreover, these are averages based on assumed mix of vehicles sold in 2025.  If buyers go for more midsize and smaller cars than planned then the U.S. fleet will beat these averages.  If they go for more large trucks, vehicle makers will have trouble meeting the CAFE goal.  Well maybe not.  The 2015 Ford F-150 looks like it will be close to meeting the 2025 30 MPG goal  for Large Trucks, making one wonder where they can get to in 10 years.

If we take government mandates out of this equation we see a trend emerging out in the real world.  The very popular midsize segment (e.g., Toyota Camry, Ford Fusion, Honda Accord, etc.) is already bumping up against the 50 EPA MPG rating in their Hybrid guises.  And hitting over 100 MPGe (a benchmark variant to take into account energy from the power grid) in their plug-in Hybrid variants.  And that is with 11 years, or basically two new vehicle generations, yet to come before midsize cars are estimated to average 53.8 EPA MPG.  You can have a 50 MPG class car today, and every year they become more common.

A few recent events in my life had me start wondering if there is a diminishing return on continuing to push improvements to fuel economy.  One of those events is that I’ve been driving one of the near 50 EPA MPG cars for the last six months.  Another is that we’ve been helping a friend look for a new house.  A third is I’ve had some family members make moves recently.  The first made me realize I hardly think about buying gasoline, or the expense of gasoline, any more.  The latter two made me think of scenarios.  The result was a thought experiment on if most car buyers will care about going beyond the 50 EPA MPG mark.

Let’s take two scenarios.  The first is someone living in an urban residential neighborhood.  They have a one-way commute of 5 miles or less.  The second is someone living in the suburbs.  They have a one-way commute of 25 miles or less.  Now obviously there are numerous other scenarios, but if we take the oft-repeated claim that the vast majority of drivers average less than 40 miles per day than our round-trip numbers of 10 (urban) or 50 (suburban) take in nearly the entire non-rural population of the U.S.  So these two scenarios seem worthy of analysis.

Let’s start with our Urban Dweller (UD).  UD has a commute of 50 miles per week, and with our 50 MPG car thus uses one gallon of gas.  Here in Colorado you can currently find regular gasoline for under $3.50 per gallon, but in some other areas of the country it is approaching $4.00.  For our analysis we’ll assume the price of a gallon of regular gasoline is $4.  So how much does UD spend on gasoline to get to and from work?  $4 per week.  That doesn’t sound like much.

For a gut-check do a comparison to mass transit.  A ride on the NYC subway is $2.50, which means a week of round-trip commuting travel is $25.  A 10 trip 2-zone bus/light rail ticket here in Denver is $20.  Now I know that comparing gas costs alone to a mass transit ticket is going to set off an apples to oranges alert in your head.  But I think it’s a valid gut check on variable costs.  If you own a car than most of the costs associated with it are incurred whether you drive it or let it sit in the garage.  The variable costs are mostly those associated with the fuel you use.  For mass transit more of their fixed costs are represented in the ticket price (although a lot of them are captured in taxes paid whether you use mass transit or not).  But for you as a commuter, the ticket price is purely variable costs.  You only pay them when you use the service.  And yes there are other variable costs, like parking, for using your car.  But since those occur regardless of MPG, and vary dramatically by where you work (free at office park vs. $ at downtown office building), I’m going to ignore them.

Let’s do another gut-check.  Colorado minimum wage is $7.78 per hour, so fuel for commuting takes less a little over a half-hour of work per week at the bottom end of income scales.  Colorado median personal income is $868 per week, so for most of us that gallon of gas is a truly irrelevant cost.

What happens if gas hits $5 per gallon?  At 50 MPG it is almost unnoticeable.  What if it hits $8 per gallon?  Obviously for a minimum wage worker every penny is noticeable.  But for a median income worker it’s one less cup of coffee per week in theory, and probably unnoticeable in practice.  And your variable transportation cost is still lower than it is with mass transit.

So let’s switch to our suburbanite (S).  S uses one gallon of gasoline per day, for a weekly fuel cost of $20.  A $1 rise in fuel price takes them to $25, or one less coffee per week.  A doubling of gasoline prices takes them to $40 per week.  While this extra $20 has clear impact on a minimum wage worker, it is also unlikely that you’d commute 50 miles round trip for such a job.  But for a median income worker we are talking about fuel taking another 2% of their income, not insignificant but not devastating either.

What about a mass transit comparison for S?  A LIRR monthly ticket for an approximately 25 mile distance from Penn Station comes to $65 per week.  Denver doesn’t have a commuter rail system, but an RTD Light Rail 4-zone (which does cover many suburbs) monthly ticket works out to $42 per week.  So for S even a doubling of gasoline prices means their variable transportation costs would remain under the cost of using mass transit.

Now let’s try to understand the value of increasing fuel economy.  At 75 MPG UD would save $1.36 per week.  Not enough for even a tall drip coffee at Starbucks.  At 100 MPG UD would save $2.00 per week.  Barely enough for that tall drip coffee.  At 75 MPG S saves $6.80 and at 100 MPG $10.  So a little more noticeable, but still not a significant benefit to their economic wellbeing.  We’re talking in the range of  switching from Tall Lattes to Venti Vanilla Lattes here.  And the problem in all of this is, we’re only looking at variable costs.

Our push to increase fuel mileage is increasing the fixed costs side of the equation.  A 50 City/45 Highway MPG City Honda Accord Hybrid starts at $29,155 while the 124/105 MPGe Honda Accord Plug-In Hybrid starts at $39,780.  There is no conceivable change in variable energy costs (and moreover keep in mind that electricity costs will rise in any catastrophic environment that drives gasoline prices insanely high) that can make up for this increase in fixed costs.

What about other things, like weekend use of the vehicle?  I didn’t cover it here, but everything extrapolates rather cleanly in any case.  Let’s say UD uses another gallon of gas on weekends to visit their parents in the suburbs, run errands, etc.  It doesn’t really impact my entire point.

And what is that point?  There appears to be a diminishing economic return on improving fuel economy beyond 50 MPG.  Note I’m not saying there isn’t some return, just that once the consumer mindset is that spending for gasoline is an insignificant part of their expense structure they will stop caring about further improvements.  Moreover, they will focus even more intensely on fixed costs.

The average age of cars on the road today is over 11 years.  If you own a 50 MPG car today and a decade from now you are offered a 100 MPG car, but at a price way beyond the (inflation adjusted price) of the 50 MPG one you already own, you won’t have economic justification for buying it.  The average age of cars on the road will stretch to 12 years, 14 years, or even more.    To sell cars with MPG beyond 50, they’ll have to improve without increasing fixed costs beyond the improvement in variable costs.

This has implications for all segments of the auto industry.  By 2025 we are going to see non-hybrid gasoline powered midsize cars hitting the 50 EPA MPG mark.  Diesel powered ones will reach that point sooner.  If my economic arguments old true then full hybrids, which have become a significant part of the market, will return to niche status.  And plug-in electrics will have to hit unsubsidized price points that differ little from that of their gasoline-powered cousins to achieve mass market appeal.  Natural Gas will remain mostly a fleet fuel.  And Fuel Cells?  They’ll never get past the curiosity stage.

Is 50 MPG a magic number?  Not exactly.  Government mandates have made it one.  The economic argument I make above could be made with other numbers.  Maybe 40 MPG is the real magic number, maybe 60.  Maybe something else.  I went with 50 because that does represent a sort of speed bump on our current journey, and it’s a round number making back of the envelope calculations easier.  We are there now with hybrids and we’ll be there soon with non-hybrids.  Whatever the exact number, we are approaching the point where consumers are going to feel like fuel costs no longer matter.

Obviously if you can buy a 47 MPG version of the Ford Fusion (i.e., the Hybrid) why does anyone buy the non-hybrid version that does less than half as well in the city and 1/3 worse on the highway?  Currently 88% buy the non-hybrid version.  With a 5 year payback period from the higher fixed cost of the Hybrid most consumers don’t find it a compelling option.

On the other than the Lincoln MKZ variant of the Fusion is priced identically for the hybrid and non-hybrid version.  In the first quarter of 2014 a third of MKZ buyers went for the hybrid.  Why not 100%?  The non-hybrid has more trunk space and better acceleration, but I’d venture skepticism over hybrids is the number one reason.  And perhaps supply limitations.  Lincoln couldn’t supply 100% of its MKZs even if it wanted to, at least not without significant lead time.  So there are plenty of non-hybrids on dealer lots.  But Lincoln has been shifting the production numbers more towards hybrids, and will keep doing so as long as buyers soak them up.

I’ve focused a lot on the mid-size car segment of the market, but even Ford Escape class SUV/Crossovers are expected to approach 50 MPG in 2025.  And with the 2015 F-150 and the 2014 Dodge Ram 1500 EcoDiesel already nearing 30 MPG, my arguments apply over the broad population of “light” vehicles sold in the U.S.

Is there a bottom line here?  Economics drives consumer purchasing behavior, particularly in the long-term.  Yes there are some buyers who will make “poor” economic choices in favor of other priorities, from the philosophic (e.g., environmental concerns) to the esoteric (the Tesla is a really cool car), but they don’t represent the vast majority of buyers.  And because of that I think we are rapidly approaching the point where buyers won’t pay for better fuel economy.

Posted in Uncategorized | Tagged , , , , | 8 Comments

Will Microsoft get the new Surface(s) right? Part 2

Having done a bit of a post-mortem on the original Surface products and strategy in Part 1, I can now dive into what I think Microsoft needs to do in order to succeed with the Surface family.  The first thing I think Microsoft needs to do is eliminate the confusion around what the Surface brand is all about.  Note this is not just about branding, but rather about creating a clear product strategy and establishing principles that drive the design center for products in the Surface family.

The clear guiding principle for the Surface family should be “Productivity First”.  That is, every member of the product family should have being the best productivity device in its class as its primary design center.  “Productivity First, Entertainment Second” might be a more complete description of the design center.  Using the Content Consumption vs. Content Creation axis I’ve talked about before, Surface devices should always lean more towards Creation than competing devices in the same class.  That may be saying it too mildly as the correct positioning is that they should trounce other devices in the same class at Content Creation.  At the same time they need to be competitive at Content Consumption so that a user need only carry one device in any given class.

I kind of went at that backwards so let me explore this strategically.  Microsoft’s strength is in Productivity software and Content Creation.  It wants to win the consumer, but it can’t do that in a head-on attack on the players who dominate the Content Consumption space.   No Surface will ever be a better overall Content Consumption device than an iPad.   Nor will it ever be as good a portal into Amazon’s content libraries as a Kindle Fire.   Even if Surface is technically superior at Content Consumption, it will never be perceived as such!  And while the iPad and Android devices may achieve success as productivity devices, Microsoft has a clear opportunity to make sure that they are always considered a distant second to Surface in this area.

Notably “Productivity” and “Content Creation” does not imply purely business use, although clearly they allow Microsoft to win big in the Enterprise.  One of  the modest success stories for the original Surface is in education, both in institutional purchases and individual student purchases.  And while Microsoft Office is a large part of the Productivity story, it is not the only story.  Being the best device as a Pilot’s Electronic Flight Bag, or for a Doctor to access Electronic Medical Records, or for a retail employee to provide customer service on the store floor, counts as well.  Nearly all users make some use of all devices for productivity purposes.  The strategy around Surface needs to be to have the best device in class for anyone who values those productivity capabilities above the (perceived) superior entertainment capabilities of competing devices.

With Surface/Surface 2/Surface Pro/Surface Pro 2 Microsoft clearly had the productivity attribute in mind, but that itself is the point.  It was just an attribute.  It was not the unambiguous strategy.  It was not the design center.  It was not at the center of the branding and resulting messaging.  The Surface/Surface 2 don’t have digitizers.  They only had a version of Office Home and Student, which also didn’t include Outlook.  The positioning of the Touch vs. Type Cover (Touch for Surface, Type for Surface Pro) made content creation secondary.  The shipment priority favored the more Content Consumption oriented Surface/Surface 2 over the more Content Creation oriented Surface Pro/Surface Pro 2.  The advertising and other messaging also was overwhelmingly tilted towards the entertainment rather than productivity nature of the devices.

For Microsoft to succeed with Surface going forward “Productivity” must be the way it intends to win, the key driver of its product designs, and the unambiguous meaning behind the brand “Surface”.

Before moving on I want to be clear, all Surface devices must be competitive (even great) Entertainment/Content Consumption devices as well.  I’m not trying to say Microsoft can ignore this space, because if a user has to carry an 8″ or 10″ class Surface and an iPad or iPad Mini too many will probably just carry the iPad/iPad Mini.  I have to be able to watch movies, read books and magazines, track news and blogs, and play games on my Surface.  I just don’t need to beat Apple, Samsung, Amazon, and Google at it.  But the reason you buy a Surface over a competing device is because you have a productivity need.

What “Productivity” means is going to vary by device class.  For example, in sub-9″ class devices it probably doesn’t mean a keyboard cover (though it could).  That’s a device class where note taking and handwriting as an input mode takes more of a priority.  Microsoft has had a technological lead in this area for a decade, and it’s finally time for them to press that advantage.  An active digitizer as a feature of all members of the Surface family would not be a bad place for Microsoft to start.

In the 10-11″ class devices the keyboard cover is a perfect example of an advantage Microsoft has, and one that would have been of greater benefit had the strategy, positioning, and branding been clearer.  Also the execution.  The much improved Touch Cover 2 is almost in the Unicorn category as it is never actually in stock at Microsoft stores, Best Buy, etc.  The announced Type Power Cover is even worse, it is vaporware.

For larger Surface devices, such as a 12-13″ class device that many have been waiting for, having a 2-in-1 with the design optimized for notebook usage seems right.  Certainly a notebook-oriented design center, even a pure notebook, seems like a winner.  I haven’t said much about this class device, but it is indeed the missing link in a Productivity device family offering.  13″ is about optimal for a truly mobile, primary Content Creation, device.  Any larger and you lose mobility.  Any smaller and you are really talking about a secondary device.  Sure 15″ notebooks and desktops with multiple 23″ monitors are better for Content Creation, but they range from marginally mobile to completely immobile.  Microsoft needs to win in the higher growth rate mobile categories.

Now let’s talk about pricing.  This is something that Microsoft has screwed up badly with Surface to date.  They have to get it right with the upcoming announcement.  As an underdog in the 7-8″ and 10-11″ categories they need to use pricing to drive adoption.  In the 12-13″ or above this is less critical, but they still don’t want to price themselves out of the market.  So let me offer some general guidance and then drill in a bit.  For ARM-based devices Microsoft needs to price very aggressively versus the competition.  For x86-based devices in the 7-8″ or 10-11″ category they need to price slightly aggressively.  For 12-13″ or above devices they need to be competitive, but there is no need to be the price leader.

So let us first talk about ARM.  Microsoft is at a huge disadvantage with ARM-based devices because of two sides of the same coin.  On one side they have a huge gap in Windows Store application availability compared to either Apple or Google.  On the other side they have a huge advantage in Windows-based productivity (and entertainment) applications that they can’t run on ARM.  The net impact is that I think consumer perception of ARM-based Windows RT devices is that they are worth $50-75 less than an otherwise equivalent x86-based device at the 7-8″ class and $100-125 less in the 10-11″ class.  The current state of the Windows Store also makes an ARM-based Windows tablet worth at least that much less than a similar Apple, Samsung, or Google Nexus device.  I’ll call this the Perceived Consumer Value Adjustment (PCVA).

The most productivity oriented 8″ tablet on the market is the Samsung Galaxy Note 8, which has the active S-Pen, with a Suggested Retail Price (SRP) of $399 and a street price of $329.  Another competitor from Samsung is the Galaxy Tab Pro 8.4 which also has a $399 SRP but a $359 street price.  The ASUS VivoTab Note 8 x86-based Windows 8.1 tablet with an active digitizer lists at $329 but is currently selling at the Microsoft Store for $299.  The Lenovo Thinkpad 8, which has a higher resolution screen but no active digitizer, lists at $449 but is already selling for $399.  It too is an x86.  Meanwhile the Apple iPad Mini with Retina Display lists at $399 and can be found for slightly less.  Taken together this suggests a “Surface Mini” that is about 8″ with a Retina-class display and an active digitizer could command an SRP of about $399.  But apply PCVA and an SRP of $329-359 makes more sense.

Given that Surface devices, like Apple devices, have street prices almost identical to their SRP, the $329-359 price range is likely still too high.  The Galaxy Note 8 is old at this point, which accounts for its large discount from SRP.  A refresh would probably leave it with a street price around $359.  If we average the ASUS and Lenovo street prices we also end up around $359.  Apply PCVA to $359 and it suggests that a 8″ ARM-based Surface should have an entry price of $299 or less.  There are many other data points that suggest a $299 price would be a good entry point for this class Surface.  Lower-spec Windows devices in the same class, such as the Dell Venue 8 Pro, are already selling for $249 and occasionally less.  They will be dropping to $199 in the next few months.  The non-retina display iPad Mini sells for $299.  The Samsung Galaxy Tab 4 8″ has a $269 SRP and is selling for $239.  Etc.  So $299 is an aggressive price relative to other high-end and more productivity-oriented tablets, but a high price relative to more modest spec’d and Content Consumption-oriented tablets.

Actually I was applying 8″ pricing under the assumption the Surface device was really an 8″ class device.  If it is a 7″ device then it will need to be priced at least $50-100 lower.

Ok, that was a fairly analytic approach to pricing.  But what if Microsoft wanted to flood the market with these devices and really incent developers to create  Windows Store apps?  Then they should price an 8″ ARM device at $249 or a 7″ ARM device at $199.  At that price I’ll not only buy one for myself, I’ll give a few as gifts.

You can apply this same analysis to either the Surface 2 or a replacement, should Microsoft announce one.  A Surface 2 with Touch Cover (or better yet, Touch Cover 2) for $399 would gain traction.  If you replaced the ARM processor with an Atom x86 processor you could charge $449 for the combination with similar results.

And if Microsoft introduces something in the 12-13″ class?  No adjustments necessary.  No unusual pricing necessary.  Just price to the current competitive situation for 13″ Ultrabooks and Macbooks.

I’ve spent so much time on pricing because I think this is critical to the short-term, and thus long-term, success of the Surface family.  Microsoft must use pricing to make itself a force in the market for under 11″ computing devices.  It must use it to make up for both perceived and real shortcomings, both in the general case of the Windows Store having an inferior app selection and the specific case of ARM-based systems not having the ability to run desktop applications.

I want to talk about one more topic which is WWAN (3G/4G/LTE) support.  Microsoft has mostly shied away from including WWAN support in its Surface family.  Yes the Surface 2 belatedly got WWAN support, and then only as a very expensive option.  I won’t purchase any further tablets without LTE support, and I know many others are in the same boat.  Both Apple and Samsung introduce both WiFi-only and WWAN versions of their tablets.  Failure to do so leaves a significant segment of the buying population uninterested in your device.  It also leaves you out of the extensive retail footprint of the carriers, as well as that of  independent mobile-oriented retailers.

Microsoft has to fully commit to WWAN in devices under 11″.  That would obviously be at a premium price above the entry-level pricing exercise I did earlier.  “Mobile First, Cloud First”.  You can’t be mobile without WWAN, so if I don’t see WWAN support in the May 20th announcement then I think Stephen Elop should look at making changes in leadership of the Surface team.

Productivity First.  Fill out the family.  Price to SELL.   And, on a different level, WWAN support.  That’s what I think Microsoft needs to do to get the new Surfaces right.




Posted in Computer and Internet, Microsoft, Mobile, Windows | Tagged , , , , | 45 Comments

Will Microsoft get the new Surface(s) right? Part 1

It appears that on May 20th Microsoft will announce at least one new member of the Surface family, most likely a Surface Mini (aka 7-8″ class device).  The rumors have heated up suggesting that there will actually be two or more new Surface devices introduced.  Now that would be exciting!

From my perspective this is pretty much the make or break announcement for the Surface line.  The Surface/Surface 2/Surface Pro/Surface Pro 2 generation of devices grew out of Microsoft’s pre-Windows 8 launch thinking.  Yes the 2s are the same generation as the originals, nicely upgraded but still based on the original design center.  Whatever we see on the 20th are the first devices that could have been seriously impacted by what Microsoft learned from the Windows 8 and Surface launch experience.  The first that could have a different design center.  And the first where new CEO Satya Nadella can influence the pricing and positioning (though not the designs themselves).

Part of Microsoft’s problem with the original Surface was its schizophrenic positioning.  Was this a content consumption device positioned against the iPad or a content creation device positioned against the MacBook Air and Ultrabooks?  I discussed positioning in my original “review” of the Surface, which didn’t get to the marketing side of things.  What Microsoft tried to do initially was position the Surface as a content consumption device and the Surface Pro as more of a content creation device.  They missed the mark on both.

The Surface didn’t find acceptance as a content consumption device for two major (and a few modest/minor) reasons.  First, it was considerably overpriced.   Microsoft thought they had a lot of value in the device that consumers didn’t see.  Second, the device had no apps.  By basing the Surface on an ARM processor, thus limiting it to only new Windows Store apps, Microsoft had created a version of the “Which came first, the Chicken or the Egg?” problem for itself.  They could have broken through by pricing the Surface aggressively to drive sales volume that created a pull on app developers.  But they didn’t.  Consumers stayed away.

Where the Surface showed some promise, and did gain traction after last fall’s price drop, was amongst people who needed a Microsoft Office-centric productivity tablet.  Basically something even more into the Content Creation space than Microsoft’s original positioning.  Unfortunately Microsoft was slow to follow-up on that limited success and has kept the Surface 2 priced much too high to build on last fall’s traction with the original Surface.  It has been overpriced by at least $100.  A Surface 2 with the Touch Cover for $399 would be a compelling offering.  But at $530 it is a non-starter.  And the pricing of the LTE model is outrageously non-competitive.

The ARM-based Surface continues to face the problem of a weak app library.  My most recent example is the lack of a Windows Store app for Amazon Instant Video, meaning I can’t take my Amazon content offline.  So on my expensive Surface I couldn’t download my Amazon videos to watch on the airplane, but on my inexpensive x86-based Dell Venue 8 Pro I could (because I could install the desktop Amazon Unbox video app).  I left the Surface at home.

High price, lack of consumption apps, and a myriad of more modest consumer disconnects (e.g., the bet on a 16:9 aspect ratio hasn’t paid off, very late delivery of LTE support) doomed the Surface/Surface 2.

The Surface Pro/Surface Pro 2 is more of a success story.  It offers an amazing set of capabilities in a small package.  Unfortunately it is too thick and heavy for use as a primary tablet, and has too small a screen for most people to accept as a primary Content Creation device.  So it is a niche product for those desiring a secondary Content Creation device with good Content Consumption capabilities.  If Microsoft had gotten the thickness and weight down with the Surface Pro 2, and priced it just a little more aggressively, they could have had a smash hit.

Unfortunately Microsoft botched the rollout of both the Surface Pro and Surface Pro 2.   In the case of the original Surface Pro they prioritized shipping the Surface first, even though the Surface Pro would have been an instant success and driven Windows Store app development.  By the time the Surface Pro shipped it was tarnished by the poor acceptance of the Surface and poor battery life associated with a dated processor that had already been superseded in Intel’s family.  In the case of the Surface Pro 2 they had availability problems, and then failed to deliver critical accessories, such as its docking station and the power keyboard cover, in a timely fashion.  Thus despite having a solid product, Microsoft simply botched the opportunity.

In Part 2 I’ll discuss a new design center for Surface and suggest what I’m looking for in the next set of products they introduce.

Posted in Computer and Internet, Microsoft, Mobile, Windows | Tagged , , , , , | 14 Comments

Free Windows (TANSTAAFL)

Some are touting yesterday’s announcement that Microsoft was making Windows (including Windows Phone) free for devices with screens smaller than 9″ as the most impactful news coming out of Build 2014.  While I do think it is important news, I think other changes such as Universal Apps are far more important.  And there is one executive discussion I’d really have liked to sit in on that I’ll talk about near the end.

Current Microsoft profit from Windows Phone and Windows on small screen devices is at best rounding error and at worst represents a loss.  The story on revenue isn’t much better, it is immaterial.  That’s important since it is what matters to investors, and in the long run it is what determines how sustainable a move this is.  Microsoft basically gave up nothing in a “Hail Mary” pass to establish relevance in the software for mobile device market(s).

Some of the software pricing move is related to Microsoft’s evolution to a Devices company so let’s explore Windows Phone first.  With closure of the Nokia Devices acquisition Microsoft will itself be shipping 90%+ of Windows Phone devices.  Today Nokia sells a phone for say $150 and sends Microsoft a check for (say) $15.  Tomorrow Nokia’s sells that same phone for $150 and doesn’t send Microsoft a check.  But since Nokia is now part of Microsoft that $15 still accrues to Microsoft’s finances.  It is, in every sense except a financial reporting one, a neutral financial move by Microsoft.

Microsoft is trying desperately to foster a OEM model for Windows Phone, particularly as it relates to BRIC and developing countries.  In those extreme cost sensitive markets the price of Windows Phone is an issue, while the revenue and profit potential from software for phones alone is immaterial.  Another way to look at this, and it is even possible this is technically how Microsoft’s OEM contracts are structured, is that Microsoft is returning 100% of the price of a Windows Phone license to the OEM as Market Development Funds (MDF).  But even if the contract actually shows a price of zero, in which case Microsoft probably isn’t providing MDF, Microsoft has in effect committed the revenue it might have gained from charging for Windows Phone licenses to marketing.  That’s the correct way of thinking about this.

And the same story applies to smaller screen tablets.  Right now the market for those, aside from the apparent modest success of the Dell Venue 8 Pro, is immaterial to Microsoft’s bottom line.  Microsoft needs to protect its larger form factor Windows revenue stream by taking a very significant share of the smaller form factor tablet market and is willing to “spend” 100% of what it could have taken in on revenue for those Windows licenses to gain that market share.

Why is that market share gain so critical?  Because every iOS or Android device in someone’s hands represents an opportunity for Apple or Google to replace a notebook or desktop as well.  Chromebooks make no sense for me because I am not bought into the Google ecosystem.  The MacBook Air makes no sense to me because I am not bought into the Apple ecosystem.  But if I were a dedicated Android or iOS user I would be, and thus more likely to also become a OS X or Chrome OS user.  So every Windows Phone or Tablet win represents a chance to keep someone in the Microsoft ecosystem and sell them the products for which Microsoft really makes money.

As for the conversation I wish I could have been a fly on the wall for, it’s the one they must have had about setting a precedent.  What happens if Microsoft’s wildest dreams come true and it becomes the top supplier of phone and/or tablet OS software?  Can it raise prices and monetize that success?  This is why I always envisioned the technical pricing details as a 100% kickback in MDF rather than a zero list price.  You can always phase down MDF but raising prices will be like tiptoeing through a dense minefield.  I’m sure Microsoft longs for a day when it must face this problem!


Posted in Computer and Internet, Microsoft, Mobile, Windows, Windows Phone | Tagged , | 7 Comments

Let the Build 2014 games begin!

We are just a few hours away from Build 2014, and the most important set of reveals for Microsoft’s Operating System business in a decade.  Yes, more important than Windows 8.  Or Windows Phone 7.  Or whatever other seemingly, at the time, critical reveals Microsoft has had.  The reason for that is simple, the Operating System business at Microsoft continues to struggle.  Sure it had a temporary reprieve with Windows 7, in what now looks like a “dead cat bounce”.  But otherwise Microsoft’s relevance for software that powers hardware has been, at best, in a holding pattern for a decade.

What gets announced and talked about this week won’t be the launch of totally revamped products that change the world but rather products that tell us if Microsoft is getting its OS mojo back.  Hopefully we will learn where Microsoft sees its core Desktop OS efforts going the next few years, the very thing it all but mortally wounded with the release of Windows 8.  This is about more than just some continuing tweaks to make Windows 8.x more appealing to desktop users, it is about sending them a message that they are important and will have optimized support going forward.  And it is about reassuring Win32 and a.NET developers that they have a bright future as well.

Next up is eliminating the arbitrary discrepancy between Windows for Tablets and Windows for Phones.  Of the three major ecosystems only Microsoft has this disparity.  iOS and Android are the same, and most importantly have the same development model, on all slate form-factor devices.  On Windows the discrepancy has caused the app stores for both Windows and Windows Phone to stall.  Many apps are available on one platform but not the other as developers are forced to choose between supporting one #3 platform or having two separate efforts for two #3 platforms.  This has been devastating.  Based on leaks it appears certain that after this week developers will be able to focus on one app for both the phone and the tablet (and of course, all Windows form factors).

At the same time its critical that Microsoft bring its app model to parity with iOS and Android, eliminating barriers that have caused leading edge apps to skip the platform.  It can no longer be the case that underlying platform capabilities are blocked by the lack of support in the new APIs.  We can’t have the most interesting new app categories skipping Windows devices because, after all the evangelism is done, they simply can’t get their app to work on Windows.  Nor can we have the situation where some of Microsoft’s own properties find it easier to implement new features on Android or iOS than on Windows.

It is also time that Microsoft dropped the excuse that it is playing catch-up in the mobile OS space.  If Windows Phone can’t be competitive at the user feature level in 2014 then it just never will be.  Oh I’m not saying it needs to leapfrog Android and iOS and leave them behind, as if it ever could really do that.  I’m saying that as users we have to be able to see Windows Phone as every bit as leading edge as Android and iOS.  It needs to be at parity on everything that is important to users, and continue to innovate in ways that set it apart.  Windows Phone 8.1 must be the end of the line on “catch-up” if Microsoft wants end-users and developers to commit to the platform.

Following on from last week’s clear focus on the cloud we need to see how Windows is going to be the best OS to power cloud-connected devices over the next decade.  We simply need to walk away from Build 2014 believing this.  As a user of the entire Microsoft ecosystem I see and enjoy the promise on a regular basis.  But if I were a 100% Apple user or 100% Google user then my experience wouldn’t be much different.  I think this is a tall order for Microsoft as the world, and especially developers, have to believe two things.  The first is that in a 100% Microsoft ecosystem Windows-powered devices have to offer a better cloud-connected experience than in 100% Apple or Google worlds.  The second is that Microsoft has to show why Windows-powered devices will be the best end-points in a heterogeneous environment.  And they have to do that despite Apple and Google not playing nice.  Apple is not a surprise since with the exception of iTunes they ignore the Windows platform.  Google is a bigger problem as they have explicitly avoided legitimizing Microsoft’s Phone and Tablet offerings with Windows Store apps.

Lastly, the “Internet of Things” is the next frontier for the OS business and Microsoft has been fairly absent in letting us know how they plan to address that market.  Keep in mind that this is another area where Microsoft was early, way too early.  Now it is faced with the problem of being leapfrogged by the competition, and Google in particular.  Microsoft can not let this happen.  It must give its remaining development community a reason to stick with it as this new gold rush begins.

Fortunately through leaks and through what little information it has released, like the schedule of Build sessions, we know that Microsoft will be addressing most if not all of these areas.  Will it be enough?  Will the messages resonate with the believers and bring some non-believers back?  The technical details are one thing, what Microsoft executives say during the keynotes are far more important.  If they paint a picture of a Windows world that users and developers really want to play in then a revival of the Windows business is possible.  If they fail to excite then they probably relegate it to a legacy business.  Either way Microsoft will survive and prosper.  But its future is a lot brighter if at the end of this week the key stakeholders are a lot more positive about the future of Windows than they were at the end of last week.

Posted in Computer and Internet, Microsoft, Mobile, Windows, Windows Phone | Tagged , , , | 20 Comments

Microsoft has a near miss with the Xbox One Media Remote

Regular readers will of course be familiar with my Xbox: Fail from January, and I thought a little update was in order.

To get something out-of-the-way, the February and March updates did nothing noticeable to improve voice recognition.  I did recalibrate after the February update, but not after the one in March.  Maybe I’ll try again after the April update.  And it appears to me that one of the updates degraded facial recognition as much of the time my Xbox One isn’t recognizing me and automatically logging in.  To put a short summary on it, the experience is no better than when I wrote the piece in January.

And to say something positive, I love that Microsoft added music videos to the Xbox Music app on the Xbox One.  We had company for the weekend and Saturday night we all stayed up past midnight finding favorite music videos.  On the few we couldn’t find on Xbox Music I found them on the web and put them up on our 55″ using Miracast from my Lumia 2520.  That worked flawlessly too.  Especially watching the launch of MTV.  Coverage of the first launch of the Space Shuttle is way cooler than any music video 🙂  And Video killed the radio star is a terrible song, even if it was perfectly appropriate as MTV’s first music video.

One thing I called for in the January piece was a Media Remote, and Microsoft has obliged with that.  I really like it, and if it weren’t for one major design flaw I would have titled this post “Xbox One Media Remote saved my marriage”.  That major design flaw?  The Xbox One Media Remote uses IR rather than RF to control the Xbox One.  That’s a problem for me because the Xbox One is in a cabinet, with a door blocking IR signals.

Given that the Xbox One come out of the box working with RF-based game controllers I never would have guessed that they’d use IR for the Media Remote.  Why not just have it use the same RF communications channel?  I hate IR.  It is the 80-column card of the A/V industry.  Except 80-column cards were a good idea in their time while I’m not convinced IR was ever a good idea.  In either case, their times have passed!

Dear Xbox team, wait until you see the blog post when one of my dogs crashes into the open door and breaks it off the built-in cabinet.  Wait until I send Satya the bill and demand payment in Hyderabadi Biryani, which I will do.  Seriously.

Anyway now I do open the cabinet door to consume media on the Xbox One.  This makes my wife happy because she interprets the voice commands about as accurately as the Xbox.  For example, I say “Xbox Select” and the Xbox displays a message about something else not being valid in the current context, if it hears me at all.  My wife interprets “Xbox Select” as “Dial Divorce Lawyer”.  Fortunately she tunes me out even better than the Xbox though I try not to press my luck.  So I no longer talk to the Xbox.

Meanwhile with the cabinet door perfectly positioned to absorb the shock of a Bernese Mountain Dog that is blissfully unaware that the U.S. Government has classified her as a weapon of mass destruction, I happily select apps, perform searches, play and pause media, etc. on the Media Remote.  It’s an accessory that I recommend to anyone who is going to regularly use their Xbox One for video.

What about installing (another, actually) IR repeater so I don’t have to leave the cabinet door open?  I suppose I will eventually.  But I hate IR, and I love Hyderabadi Biryani.

Posted in Computer and Internet, Home Entertainment, Microsoft | Tagged , , , , | 9 Comments

10″ LTE for me

One of the things that has bugged me about Windows 8.x from the beginning was the lack of devices with built-in WWAN, and particularly LTE, support.  I had 3G support in my original iPad, and it was a pleasure to just be able to open the case and start using the device without worrying about finding and connecting to a working WiFi network.  Not to mention the security advantages of avoiding public WiFi or avoiding draining the battery of my smartphone being used as a hotspot.  For the last couple of years I’ve been envious of my wife, who has her iPad on the Internet before I even have time to get my smartphone out of my pocket.

With the introduction of the LTE version of the Microsoft Surface 2 it turned out there were three devices I could choose from if I was serious about moving to a LTE device.  The final straw came the other day when I pulled my Lumia 1020 smartphone out of my pocket and discovered the battery was moments from being dead.  I just had to stop using it as a hotspot on a regular basis.  I’d thought about waiting to see what other devices hit the market in the next few months, and in fact I wouldn’t be surprised if I’m soon kicking myself for moving prematurely.  But what’s done is done.

A word about my computing environment before diving into my choice and a bit of review of it.  Prior to last week I had 3 tablet-like devices (not including those that are primarily my wife’s).  My primary tablet has been a Microsoft Surface RT.  Although it has a keyboard cover (and I go back and forth between the Touch and Type covers) my primary usage model is as a tablet.  It’s just nice to have a keyboard when you need it.  For the last 6 months I’ve also had a Dell Venue 8 Pro, which is obviously a pure tablet.  The DV8P has pushed my usage of the Surface more heavily towards notebook-like tasks since I tend to carry the DV8P when I use want something with me for consumption and the Surface when I think I might need to use a keyboard.  So last week I would have said the Surface RT is 40% Notebook and 60% Tablet.  The DV8P is 5/95.  Lastly I have a Surface Pro 2 which I purchased for my consulting practice.  As that implies, it sits in a dock as the desktop for my home office except when I am on a consulting engagement.  Then it is used 80% in notebook mode and 20% as a tablet.

The Surface Pro 2 is unlikely to need replacement for a couple of years.  The DV8P is on the chopping block later this year as the 8″ Windows tablet market matures and we get higher resolution devices with LTE.  But it was the Surface RT that was most ready for replacement.

As best I could tell there were three choices readily available on the U.S. market as of last week.  The oldest of the three was the Nokia Lumia 2520, which was introduced last fall.  Next up was the Microsoft Surface 2 LTE, identical to the Surface 2 introduced last fall except for the addition of LTE support.  Lastly was the Dell Venue 11 Pro line which just added a LTE model.

The Lumia 2520 was an attractive device from the moment Nokia announced it.  The 10.1″ form factor made it the most tablet-like of the choices.  It was built as a WWAN-based devices from the beginning, and you can’t even buy a WiFi-only version.  It is light (1.3lb).  It has an awesome screen.  And Nokia announced a keyboard case for it, one with an extra battery and a couple of USB ports to boot.  About its only negative is that it an ARM-based device like the Surface RT and Surface 2.  I seriously looked at buying one at introduction but there was a problem.  The keyboard case was unavailable and I was loath to buy the tablet and hope that the case, which more than doubles the weight of the combination, would be acceptable.  So month after month I would go to the AT&T store and the Microsoft Store and ask if they had the case in stock so I could see for myself.  Month after month they reported it wasn’t available.

When Microsoft introduced the Surface 2 they mentioned that a LTE version would be available in early 2014.  I waited, hoping that early would mean January.  January came and went with no LTE version.  February came and went with no LTE version.  Finally March brought announcement and availability of the Surface 2 LTE at the ridiculous price of $679.  Add on a Type 2 Cover and you are sitting at over $800.  Make it the new power cover and you are approaching $900.  That’s a lot of money to part with for any tablet, particularly one that is already half-way through its primary life-cycle.

The Surface 2 is also an ARM-based device.  It is heavier than the 2520.  With its 10.6″ screen it is a more awkward shape and size for tablet use, but the screen dimensions feel more natural for notebook-like use.  It also offers a wider array of keyboard covers (Touch, Type, Power).

The last entry, which I only learned about last week, is the LTE version of the Dell Venue 11 Pro.  Dell has introduced the Venue 11 Pro line as a family of x86-based devices with a choice of Intel Atom and Core processors.  The Atom-based models are thinner and more of a tablet-first offering while the Core-based models are thicker, heavier, and more of a notebook-first offering.  Basically the DV11P Atom models are Surface 2 competitors and the Core models are Surface Pro 2 competitors.  The screen size also positions them in this way, with the 10.8″ screen being comparable to the Surface family’s choice of 10.6″.  Moreover, the 10.8″ screen clearly positions them as members of the 11″ class of devices such as the MacBook Air notebook.  For me that is the problem.

The DV11P LTE model is Atom-based, which I do prefer to the ARM-based processors used in the 2520 and Surface 2.  However the 10.8″ screen size forces the DV11P into larger overall dimensions and a higher weight than the Surface 2.  I was looking for something much closer to the iPad Air in weight and size, so the DV11P was going in the wrong direction.  Pricing for the DV11P LTE is far better than for the Surface 2 LTE, and it has as good if not better set of accessories.  In particular, if you wanted to use any of the DV11P models heavily as notebook replacements than Dell offers one keyboard/cover option that is more of a notebook dock than anything available or the Surface line.  Indeed, if I didn’t already own a Surface Pro 2 I’d be giving the DV11P line a very serious look.  But it just didn’t add up for the needs around a Surface RT replacement.

With the DV11P LTE outside the envelope of what I considered a desirable physical characteristics envelope, and the Surface 2 LTE at a budget-busting price even for someone as price insensitive as I often am, I took another look at the 2520.

Months had gone by without me so much as being able to glance at the Lumia 2520’s power keyboard case.  Earlier this month I noticed that the local AT&T store had one on display, but it was bolted down so that I couldn’t actually hold one.  Actually you couldn’t even use it because of the design of the bracket.  The store was not stocking the keyboards, and corporate was refusing to accept orders for them because of the order backlog.  When I first saw this I checked at the Microsoft Store and they still hadn’t received any.

A few days ago I went into the Microsoft Store to pick up a Media Remote for my Xbox One.  They didn’t have the keyboard case for the 2520 on display, but I asked if they had any and they said yes!  So off they went to get one from the stockroom for me to see.  Taken alone the weight and feel were quite nice.  With a 2520 installed the combination was heavy (almost 3 pounds) but good feeling.  With a caveat I’ll mention in a moment, I decided the Lumia 2520 with its keyboard case would replace my Surface RT.

With the battery in the keyboard case the 2520 should come in at 16+ hours of actual use.  I’m not going to do a battery test, but I will say that I used it fairly heavily yesterday and when I looked this morning the cover’s battery was drained but the battery in the tablet itself was at 97%.  So you really can get 2 days of solid usage out of the combination.  There are things I like better about this keyboard than Microsoft’s Surface Type Cover 2, and things I like less.  Mostly less.  There is only one viewing angle as a negative.  The loose flap the touchpad is on is another.  But the most important negative is that you can’t fold the case out-of-the-way to use the 2520 as a tablet!  That isn’t just a problem in terms of holding the tablet in your hand, it is a problem in situations like tight airplane seats where the 2520 in its power keyboard case takes up a lot more room than a Surface 2 would.  Basically the 2520 power cover transforms the tablet into a notebook.

I’m disappointed that Nokia didn’t come out with a second keyboard cover that dispensed with the battery, because as nice as it is in theory to have a 16 hour device it isn’t really worth the 1/2 to 1 pound of extra weight for most people looking for this class of device.  Dropping the battery would also allow for a case that folded out-of-the-way for tablet use.  The 2520 doesn’t have a built-in kickstand, so you need some kind of case for almost any usage scenario.  What I decided to do was look for a third-party, keyboard-less, case that I could use when I wanted to carry the 2520 as a pure tablet.  As it turns out a few case manufacturers have created 2520-specific offerings and I have one on order through Amazon for $20.  It will be a few months until I know which case I use more often.

Although I’ve made my choice I’m rather disappointed by the Windows Tablet 10″ LTE landscape.  No manufacturer has come out with the right device, at the right price, in a timely fashion.  Nokia did the right device and the right price, but missed the boat on accessory availability and variety.  Microsoft has the right device and accessories, but totally missed the boat on both price and availability.  Dell is doing things right with the Dell Venue 11 Pro line, but the line is aimed solidly at the 2-in-1 space and is sub-optimal for the tablet space.

So there you have it, I’m a Lumia 2520 owner.  I may even be a fan, but it will be a few more weeks before I’ll be able to say.

One other thing to mention.  The Surface 2 LTE and DV11P LTE both come with 64GB of storage while the 2520 only comes with 32GB.  Of course they all take micro-SD cards.  I’ve lived with a 32GB DV8P long enough to know that it isn’t a problem, and an extra 32GB certainly isn’t worth the $168 difference between the Surface 2 LTE and the 2520.

Posted in Computer and Internet, Microsoft, Mobile, Windows | Tagged , , , , | 4 Comments