Summary
PC Hardware margins are slim, or negative in some cases. Both the manufacturers and retailers are pressured to make money on attachments to the core PC sale. Nokia has experience in this type of marketplace. By selling services and attachments, Nokia can compete and thrive. Best Buy and AT&T are good strategic partners to help Nokia launch the initiative.
Analysis
The PC hardware marketplace is a commodity business. For the manufacturers, slim to negative margins are offset by the installation of OEM products on the desktop, attachments and upgrades. in the case of OEM software products, the manufacturers are either given a set fee per OEM install and/or a piece of future residual revenues driven from subscriptions to the product. In addition, they try to up-sell cases, warranties or other accessories, or up-sell a printer or a memory upgrade.
For the retailers, slim to negative margins are offset by the sales of services or product attachments. In the case of traditional retail, they up-sell service insurance programs, accessories and software products. This is why many retailers have put significant resources internally into tech initiatives such as Best Buy's Geek Squad and Staples' Easy Tech. The money made on services associated predominantly with PC hardware help alleviate the low margins on the sales of the product itself.
What is the common theme? While a computer purchase may initiate the sale, the profit is made elsewhere. Neither the manufacturers or the retailer are making money directly from the sale of the computer. What does this mean for Nokia? To me it means that as long as they can keep their loss on the hardware to a minimum, they can absolutely make it up on the service - Internet access, accessories, etc.
No where else is this philosophy more apparent than in the cell phone market. With Nokia's experience in the marketplace, I think they can capitalize on the opportunity.
According to NPD, netbooks are the only PC hardware market expecting to expand in 2009 and 2010. This marketplace, like the cell phone market, is now experiencing the entrance of players willing to provide systems for free. The money is then made through a 2 or 3 - year Internet access subscription.
Best Buy is dominating the retail PC hardware marketplace in the U.S. right now. Coupled with AT&T's current success with the iPhone, these two retailers seem like strategically good choices for Nokia's initiative.
Time will tell what Nokia's competitors such as Motorola do in response, but for the time being, I believe it is a good calculated risk for Nokia.
