Why Devices Need Content

 |  Includes: BKS, GOOG, MSFT
by: Dana Blankenhorn

What do Google (NASDAQ:GOOG), Barnes & Noble (NYSE:BKS) and Microsoft (NASDAQ:MSFT) all have in common?

They all make devices sporting wafer-thin margins, margins they all hope to make up in sales of content and software through the company stores.

How is that working out for you?

  • Google is laying off 20% of Motorola Mobility's employees. They can't afford to have so many people involved in devices and still make money, since the money is in the services that come after the sale.

  • Barnes & Noble is aggressively cutting prices on its Nook tablets, needing to keep sales strong in the face of oncoming competition from Amazon, Apple and Microsoft. Again, losses will be made up in the sale of books and other digital content on the devices, the company believes.

  • Microsoft is planning hyper-aggressive pricing on its Surface tablet, along with the creation of "pop-up stores" in malls to push the things this holiday season. The old Microsoft is back, writes Anil Dash, and it better be or the Surface will be underwater very quickly. And how could Microsoft make money at such insanely low prices? You guessed it, content.

Like it or not, Apple (NASDAQ:AAPL) is the only company in the device business that can get fat margins right now. Its brand name and reputation, along with its dominant supply chain and attention to detail, make it the market leader.

The only way to compete is by accepting lower mass-market margins, and the only way to do that is by finding other ways toward a profit. You can eliminate your channel as Microsoft does by going direct, or as Barnes & Noble does through its stores. You can cut your own costs, as Google is doing.

But at the end of the day the only promising thing you can tell your shareholders is that it will all work in the end, because you'll have people in your "ecosystem" where they will have to buy software and other content from you, and you will make up all losses on the back end.

In this way, the device is no longer an end in itself, but a means to an end. That end is back-end sales, and back-end sales are the way to measure the success of all these companies going forward. How much control of the customer can they really retain? How can they keep those customers from using other stores, without alienating them?

The profit story from today's devices, in short, will take several quarters to play out, beyond the sales cycle.

Disclosure: I am long MSFT, GOOG.