Andreas Constantinou

Retail idea #3: Selling hardware features

Retail idea #3: Selling hardware features

Another idea for mobile phone retail stores is selling hardware features – imagine buying a phone and then adding an FM radio capability to it at the point of sale for a modest surcharge. Although feasible, this concept can be realised mostly in the long term. For more here-and-now ideas on retail stores see previous posts on a visual approach to selling data services and differentiating at retail with a mobile phone health index.

Selling hardware features
The consumer purchase criteria for handsets today are the style & design of the handset, the price, the features and the bundle offered by the mobile operator (in order of importance) – the importance ranking of these criteria is roughly the same globally. When it comes to features, the consumer will often ask how good the camera is (the more megapixels the better!), whether the handset can play mp3, whether you can use a stereo bluetooth headset with it, whether it has FM radio on, etc. Business users might ask for HSDPA capability or hardware-based security.

Often the over-segmentation of handsets and features based on the manufacturer market segmentation plan will mean that one particular handset may appeal to the user in terms of style, but may lack some important functionality. OEMs today are pretty sophisticated when it comes to figuring out their lifestyle-based segmentation plans (with 50+ segments in the case of Nokia), but then again you can’t fit everyone in the same box and give them a label. In addition, consumers in developed markets are pretty demanding and could easily be spoiled for choice.

Software-only add-on features like games, ringtones and wallpapers are pretty commonplace today – you can grab them at the point of sale, through WAP, web or even SMS (and they make a several billion dollar industry). But what about selling hardware features at the point of sale ? Why ? Because post-sales activation of hardware features can mean money for the operator or manufacturer who can charge the user for activation.

Hardware flexing
One technology that can be used to enable selling of hardware features is hardware flexing. This topic was discussed at a meeting organised by the OTA Flash Forum (OTAFF) in Athens in October 2006, where I was invited as an independent analyst. This article is based on the discussions at the OTAFF meeting.

So what is hardware flexing? Handset manufacturers today tend to use a single hardware platform for a series of handsets, with some of the features flexed off (i.e. embedded but disabled). The reason is that by using a single hardware platform for multiple market segments with differentiated products, manufacturers can exploit economies of scale, tighten supply chain management and repurpose handsets for different regions. A single hardware platform keeps costs down and allows manufacturers to finalise handset hardware features just-in-time.

Naturally, the handset software has to support in-life activation of hardware features. If the necessary software is already ‘baked’ into the handset, this is fine, otherwise firmware reflashing has to be involved (either over-the-air or over-the-cable). To avoid having to manage countless permutations of software images for each combination of hardware features, updating of specific software features can be used. On mass-market (non-modular device software), the only company claiming a solution to this is Red Bend as far as I know.

Practicalities
Let’s look at some practicalities, in particular, which features to sell, how to make money, and the barriers to adoption.

Post-sales activation of hardware features has to deliver a tangible benefit to the end user. Boosting the camera quality is somewhat suspicious (were you trying to sell me a sub-standard product before?), but enabling video playback, mp3 capability, FM radio or bluetooth is ok. In other words, post-sales activation of hardware features must deliver features which are ‘on-off’ or are otherwise clearly perceived by the user as an add-on.

How you make money? There are two options:
a) The manufacturer makes money from selling the feature, while the operator makes money from airtime traffic, or
b) The manufacturer sells the device to the operator/distribution channel with the option to enable a hardware feature. The operator then sells the handset and optionally sells the feature.

As for barriers to adoption, there are a few issues although not critical. The cost of equiping a hardware platform with additional features is not great (at least it’s cheaper than having to create a new hardware platform with the extra features). Commodity hardware capabilities are pretty cheap today with bluetooth coming at a cost of sub- $0.5 and FM radio at sub- $0.2.

An important challenge I can see is that post-sales features have to be incorporated into the manufacturer’s strategic plan for each platform, which requires long-term planning (12-15 months) and thus carries execution inertia. The retail processes and the mobile operator channel strategies will have to be adapted to handle this capability. If you want to also sell hardware features OTA (via web, WAP and customer care) the process complexity increases.

The benefits to mobile operators, handset manufacturers and users alike would be substantial though. For operators it’s an extra source of revenue, as it is for manufacturers who are today redeveloping their strategies for post-sales incremental revenue (for example see Nokia’s Loudeye acquisition and Nokia Content Discoverer). As for users, they would be much less restrained in their choices . Why not pay a bit extra for the handset with perfect style and the perfect feature set ?

Thoughts ?

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