Wednesday, April 22, 2009

Low power hard drives - inadvertently BOP products

Engaget reports that Seagate is releasing a series of low-power hard-drives. Meanwhile a number of Solid State Drives have also emerged on the market over the past year.

The development of these drives can be attributed to portable media players and also the needs of Netbooks and ultra-thin computers that too are coming to market. Or in other words, these drives have been created to respond to the needs of developed and traditional markets, but they could have been developed to respond to obvious and great appeal for such devices in developing markets.

While with Geekcorps in Mali 5 years ago, we started to play with solid state drive designs. Our goal was to slim down power consumption on our computers, as they were running on solar power. We also wanted to reduce heat, which meant fewer or no fans to collect dirt in dusty Africa. This and other "off-the-shelf" adaptations led to our successful Desert PC design, which I suspect is still humming at a few radio stations somewhere on the edge of the Sahara today.

Our adaptations were not so much changing the hardware, but rather changing their intended application, or use. Such a device, the Netbook, solid state drives, or low energy drives are an obvious product for BOP (Base of Pyramid) markets, such as the BRIC(Brazil, Russia, India and China)countries, or other emerging countries, but curiously companies still move toward the high-margin developed markets first. I see such thinking in my own work today developing solar products, where the "low-hanging fruit" that we first go to pick are the big markets, classic markets, even when some emerging markets look set to be ripe.

Perhaps the analogy with solar is not helpful, but why is it that the marketing of such advances go first to the high-margin, low-volume market, rather than to the low-margin, high-volume market? Is it because this is a 1.0 (new) technology that will have limited production? Or is it because there is an assumption that a product can capture high-margins in developed markets while it is a first mover, then move to other markets when competition intensifies, or the market is saturated? Does the rich-market-first strategy mean that companies miss out on bigger lower-margin sales today? For example, in a rich-market-first scenario, Seagate could earn $50 per drive and sell 100,000 in the first year. Or, in a lower-margin scenario they could sell 1 million units with a margin of only $10 each. Net revenues in the first scenario would be $5 million and $10 million in the later. Does $10 million not beat $5 million? If so the argument for rich-market first cannot be economic. This is overly simplistic, but I believe one of the driving assumptions in the rich-market-first strategy is that there is not a lost opportunity in going to one market first, rather that the demand just waits. Conversely, in the low-margin high-volume strategy, the assumption is that there is sufficient demand to provide volume. What we continue to witness is that the later assumption is often correct, where with the pace of innovation and flatness of the world, that the rich-market-first strategy is increasingly dated, as new entrants move in quickly if a market is left untouched.

Just to throw more complexity into this discussion, the above suggests that it makes more economic sense to pursue the high-volume strategy, but perhaps the rich-market strategy has more to do with limited capacity, be that capital (increasingly true these days), human resources or simply experience (do we really know how to sell to those markets?). So, the company is starting with a constrained production capacity, where they have decided to produce y number of units and marketing simply looks for the way to maximize profits with that limited number of units; hence why we here in Canada so often don't get what our populous neighbours to the South find on the shelves.

My interest in this discussion is that the greatest needs for such technologies are in developing markets, yet the trickle down from the developed markets happens too slowly, if at all. This is confusing as there is often a sound economic argument (more profits if they chose to go this way) to why a company should pursue these markets, but perhaps Patents do mean that customers in the secondary and tertiary markets will have to wait. Should the Brazil anti-retroviral approach to medical patents be extended to technologies that could improve lives and make money if the manufacturers were to address these markets (i.e. there is no economic or humane argument to why they shouldn't be deployed today in a market), or have the market address it for them? Perhaps that kind of pressure would lead to a net benefit to all, even to the manufacturer?

RIM and the Base of the Pyramid, or low-margin high-volume market

This post is a follow-on from my last.

Over the past year RIM's stock was discounted by many because they expanded from their home turf in the high-margin business market and out to the lower-margin but larger consumer market. Many investors saw this as a poor strategy because it would effect their gross margins (the profit they make on each dollar of revenue).

The gross margin of a company is one of the few "ratios" (stats) used by investors to evaluate a company's performance relative to its peers. Conventional thinking impels a company to "preserve margins" by getting out of low-margin business, usually by selling that off and doing whatever possible to keep from having those margins impacted. RIM broke from the current and made a play with a low-margin higher-volume strategy. Perhaps it is because many Rimmers (employees of RIM) went to such a fine school (my alma mater) that they realize that ten apples is more than 5. Or perhaps they felt that the business market was near saturation, or that they needed to attack their competition from their safer turf. Whatever the reason, RIM surprised many investors this past quarter when it released new earnings. Indeed, 10 apples is more than 5, RIM's profits were up, even though their margins had slipped by 2 points. So, perhaps it is true the low-margin high-volume, aka. BOP (base of pyramid) strategy can work?

The jury is still out, however, because this week there is yet more