Coupling & Crosstalk: Products or Services?

Coupling & Crosstalk is my column in the MEPTEC Report. This column appears in the Spring 2015 edition on pages 10-11.

Electronic coupling is the transfer of energy from one circuit or medium to another. Sometimes it is intentional and sometimes not (crosstalk). I hope that this column, by mixing technology and general observations, is thought provoking and “couples” with your thinking. Most of the time I will stick to technology but occasional crosstalk diversions may deliver a message closer to home.

Products or Services?

“Paper or Plastic?” A simple grocery store inquiry? Think again: this decision has many layers of complexity as does the examination of products versus services. There have been endless discussions as to the benefits and downsides of paper, versus plastic, bags. Everything from environmental concerns, to reusability, to biodegradability, and much more has been deliberated. Just when we thought that the paper bag had triumphed with California outlawing plastic bags, a ballot initiative has intensified this debate. To some people this is a crusade, others are happy as long as they have a free garbage bag.

Is a “phone” company a product company or a service provider? In the days of “Ma Bell”, AT&T was a telephone service and today the mobile operators still consider themselves “service providers”. But it gets fuzzy fast, since customers see them as a company that sells a smartphone (a tangible product) along with the service that makes it work. Even though companies are looking for supporters of their “holy wars” – Apple vs. Android, AT&T vs. T-Mobile, etc. – most users simply don’t care as long as their phone works and talk is cheap.

Passions often run high when discussing the difference between products and services. Companies often describe themselves as a “product company” or a “services company.” Have you listened to a sales presentation and couldn’t quite tell what is being sold? A product? A service?

Ten years ago there was substantial hardware specification differentiation on the order of 20 to 30% between different makes and models of personal computers. Today this difference has shrunk to the high single digits. Why? It is true that Moore’s Law has exponentially increased the computing power available in a computer. And for PCs there are standard architectures typically based on Intel microprocessors along with the still-prevalent Windows operating system. The vast majority of microprocessors in smartphones and tablets are based on ARM intellectual property (IP) cores. This is just a fancy way of saying ARM licenses the design to multiple companies for use as the foundation of their processor design.

So the supply chain for mobile devices and PCs has consolidated? That certainly levels the playing field but that does not fully explain the underlying hardware uniformity between vendors. What really has happened is that the customer has changed from a specification-based buyer to an experience-based buyer. The user no longer cares about the processor clock speed; they care about how easy it is to use and to get their work done. This has happened as the market has transitioned from enthusiast based (a euphemism for “geek”) to mainstream user.

Computer purchasers – both consumers and corporate information technology (IT) departments – give greater weight to the user experience assuming that basic functionality is met. Once again, most users do not understand how the underlying technology really works. They simply care about what it can do for them. They also focus on the rest of the user experience including how easy it is to do productive work and how to get support when things go wrong. Don’t forget aesthetics too! Apple’s Jonathan Ive has created many generations of lust-inducing designs. As long as the customers coveted the designs, it does not matter if Apple drives the engineers, the new product introduction (NPI) teams, and the supply chain crazy with “bleeding edge” requirements.

I used to shudder when I heard the United States (US) economy being described as transitioning from manufacturing- to services- centric. With my many years of experience in designing, building, and managing “hardware” products, I bemoan the loss of “hardcore” manufacturing activity in the US. This was when I understood a “service economy” to mean an economy of only restaurants, nail salons, doctors, accountants, and law firms. Do we really need more lawyers or more complex tax codes? Are these really value-added activities? A good discussion for another time, perhaps when I am under the professional care of a mixologist…

A more enlightened version of a services economy is illustrated in the change of customer desires. Consumers have moved from purchasing basic groceries and staples (materials) to convenience foods and pre-made meals (value plus products). And there appears to be a strong correlation in increased dining out and a strong economy especially at least here in Silicon Valley. These consumers have moved from products (food) to services (“feed me”). And who doesn’t want to be waited on let alone skip the shopping, preparing, cooking, and cleaning usually required?

Perhaps product or service is a false dichotomy? The dictionary defines a product as the “result of labor or effort”. Therefore a service is a product. And when people hear “product” many immediately think of manufactured items or physical goods. We need to expand our interpretation of product to include services especially with those that are wrapped around tangible items.

We may need to stretch our paradigm for products further on the basis of value and differentiation. With cellular (mobile telephone) service in the US, a consumer may spend 5x to 6x or more on their service plan over their two-year service contract than they did on the purchase of an expensive smartphone. Due to clever marketing, the consumer is more focused on the smartphone than on the smaller monthly payments. However, these payments add up significantly over the two years. Using the classical marketing analogy, these consumers are more focused on the handle than the razor blades! And sometimes the carriers (mobile service providers) even give away the handles for free, just like razor companies, to lock in their customer base.

Differentiation, especially in commodity products, comes from the user experience throughout the entire product life. Apple was a late entrant to the smartphone market with the original iPhone in 2007. Many were skeptical especially when performance specifications were compared to existing smartphones. Not only did Apple have a different user interface based upon a touchscreen (usage model), they built out services in terms of excellent support (in-store “Genius Bars” and online) and a comprehensive application-content ecosystem (iTunes). In addition, they dramatically up-scaled the “retail experience” by building their own stores.

Those who point out the iPhone is losing market share in terms of units (~ 20%) or sales, especially to low-cost Android-based smartphones, are still looking at the world from a tangible goods instead of from a service based “products” perspective. Strategy Analytics recently reported that Apple captured 89% of the smartphone profit in Q4 2014. Apple did this by focusing on services to differentiate their products. Market share and overall volumes can be important but, with commodity products, wouldn’t it be better to walk away with substantial profits from significantly higher margin products? Not only are services the new economy but we need better metrics for evaluating performance.

Having a comprehensive product strategy that looks at the services that drive the user experience is essential. Especially if you think you just make hardware!

As always, I look forward to hearing your comments directly. Please contact me to discuss your thoughts or if I can be of any assistance.