Apple to favor lower margins

MBA students are taught to leave low margin high fixed-asset business to increase ROA. Steve Jobs defied MBA teachings with unprecedented success. Vertical integration of hardware, software and services is just one example. Tim Cook looks to continue this trend of showing business school how business is done. Recent Apple announcement will offer its operating systems and productivity suite for free. Some view this as assault on both Microsoft and Google.

Apple is in need of a change. Their iPad business growth at 6% YoY well underperforming the market. Tablet competition is more brutal than in phones where Apple has just two viable competitors to worry about. In response to headwind Apple keeps or increases the price for the iPad and MacBook lines giving up software for free. Asymco estimates $½ billion of software revenues will be foregone. Other analysts point out that software has been historically high margin business for which Apple customers were happy to pay for. Also, an opposite move of reducing MacBook and iPad prices by $100 and continue selling software and updates would be a more welcomed move by Apple customers and would mean keeping higher margin business.

Giving out Apple operating systems and productivity suite for free does not necessarily mean increased adoption and high retention with positive economies of scope effects on other business lines, such as iCloud – which also has been underperforming since launch. Microsoft historically offered the operating system and productivity suites at much higher premiums than Apple with more success. Its Windows operating system and Office for Mac are multi-billion dollar businesses, unlike Apple’s. IBM in the past also decided to offer its productivity suit for free and it has not gone anywhere anyway. It will be interesting to see results of this move.

iPhone sales growth up and iPad plummet

To me this is a surprise. We've read much about uninspiring iPhone 5 and iOS7 design that Apple adopted from Microsoft. However in the Q2 sales have grown by 20% YOY, but overall growth trend is downward.
iPad YOY sales growth is minus 15% in the same quarter. To me this is surprising as in tablet segment, especially 10 inch form factor, Apple position has been stronger than the competition. Unlike smartphone segment there is no clear number two device emerged as of yet.

Tim Cook: Surface is "a fairly compromised, confusing product"

In April of 2007 Microsoft CEO Steve Ballmer when Apple first announced the iPhone said the following: "There's no chance that the iPhone is going to get any significant market share. No chance."

This week Tim Cook called Surface "a fairly compromised, confusing product". Adding "When people look at the iPad versus competitive offerings, I think they'll continue to want an iPad."

We live in incredibly interesting times of mobile technology and business. We are not going to wait long to see if Mr. Cook is right.

Microsoft Surface Pricing

Microsoft Surface pricing is making the device direct competitor with iPad. Several of my friends were disappointed with the price of Microsoft Surface. Premium product commands premium price and the Surface is the lighthouse product. The least expensive device is $500 with $100 extra for keyboard. Many consumers may chose iPad for the same price as iPad.

In such situations I always go back to the goal of the endeavor. Microsoft wanted to show its customers and OEMs truly innovative product for the new generation operating system, product that would command attention, be a beacon for the rest of hardware makers. Additionally Microsoft did not want to disrupt OEM channel that has been effectively scaling Windows worldwide. Finally, the goal was to take market share from iPad.

The hope is that the price is right to achieve the goal. The price is right for enterprise segment for sure. Consumers will vote with their dollars soon.

http://thetechblock.com/surface-rt-vs-ipad

	Surface RT 32GB	New iPad 32GB
Cost	$499.00	$599.99
Keyboard	$129.00	$69.00
Screen Cover	$0.00	$39.00
Word Processor (Word/Pages)	$0.00	$9.99
Spreadsheet (Excel/Numbers)	$0.00	$9.99
Presentation (Powerpoint/Keynote)	$0.00	$9.99
Note Taking (OneNote/Evernote)	$0.00	$0.00
Total Cost	$628.00	$736.97

 

Kindle Fire HD 8.9 vs. iPad3

Amazon built Kindle Fire HD 8.9’’ to target iPad customer segment. How do these two tablets stack up?

Specs	Kindle Fire HD 8.9	iPad 3
Display	1920x1200	2048x1536
Size	8.9 inch	9.7 inch
Weight	1.25 lb (575 g)	1.44 lb (653 g)
Storage	32 GB	32 GB
Connectivity	4G+Wi-Fi	4G+Wi-Fi
Device price	$499	$729
Data plan (per year)	$50	$230
Camera	???	5MP
Brand	Budget	Premium

Kindle is lighter by almost 0.2 pounds and smaller by almost an inch, which is an advantage in my opinion. However iPad has higher resolution and premium brand which helps resell it at higher price later. Amazon claims Kindle Wi-Fi is 40% faster. iPad camera has 5 MP and I could not find camera specs for Kindle Fire HD; suspect it has fewer megapixels. Content is comparable across.

Comparable iPad is $200+ more expensive and data plan also costs more than 4 times. Amazon Kindle Fire HD is a very decent device at more affordable price, which should make it successful.

Nexus 7 and Surface targeting different customer segments

Last few weeks were really exciting for tablet enthusiasts. Microsoft has shocked the world by announcing its Windows 8 tablet hardware branded Surface. Windows OEMs now got the message: make great Windows products or face direct competition. Surface specs are impressive. There are several usability innovations to mention: smart ventilation to prevent overheating (iPad owners know what I am talking about) and of course, keyboard/hard cover. The later adds to the value proposition and can be clearly game changer in the tablet space. Metro UI of the operating system is another substantial addition to the value proposition. Such differentiations make Microsoft Surface target segment more affluent, direct iPad competitor.

The only news worth mentioning about Nexus 7 is price of $199, however there are comparable cheaper devices on the market today. Yes, you can buy Android tablet for less than Android phone! The device is targeting low end user and is in no direct competition with iPad, the dominant tablet device. On the opposite, it competes with other Android makers.

By introducing another low price device Google continued making the Android OEM ecosystem unsustainable mid-term by putting pressure on hardware margins. Committing to make Android devices is the road to no-profits-land, unless business model includes vertial intergation bennefitting from the economies of scope: Samsung makes own chipsets and screens, the most expensive device components; Amazon sells tons of content through its loss leading Kindle devices; Google sells advertising through its operating system. Very few Android OEMs are vertically integrated and barely profitable.

Google has made the news with Nexus 7 but the impact on its ecosystem is negative. Acquisition of Motorola Mobility puts Google in direct competition with its OEMs. Android nominal growth continues now activating 1 million devices per day. Market share growthhas stopped and there are four mid-term issues impeding it further.

Amazon Kindle Fire cools off?

When Kindle File went on sale about 6 months ago devices shipped totaled 4.8 million in Q4 of 2011. Analysts estimated strong sales numbers on par with Apple iPad which was also selling about 1 million devices per week and about 15 million total.

Now, number of online articles report that Kindle Fire fell off the cliff. Research firm IDC reports Amazon's share plummeted from about 17% in the fourth quarter of last year to just 4% in this year's opening quarter. IDC’s Tom Mainelli points to targeting and positioning difference of the two tablet products as a reason: "Apple's move to position the iPad as an all-purpose tablet, instead of just a content consumption device, is resonating with consumers as well as educational and commercial buyers." Bloomberg reports “Fatigue is starting to kick in about six months after a product has launched.” Apple sold 24% less iPads in the Q1, but somehow managed to increase market share to 68% from 55%.

However, this may be misleading. The main question to ask is how market share is defined here? IDC measures market share as devices gets shipped, not sold. I assume that Amazon shipped close to 5 million devices in Q4 for the holiday season and some did not sell and as demand seasonally weakened, resulting in Amazon shipping fewer devices for Q1. I assume that some devices shipped in Q4 were sold in Q1. Amazon has yet to disclose any numbers on Kindle sales. There is a definite seasonal effect in sales and shipments of the tablet devices but I have strong reasons to assume Kindle sales did not collapse as shipments indicate. If you look at comScore report showing global digital device usage (not shipments or sales), Kindle Fire commands more than half (54.4%) of Android tablet market, which trumps runner up Samsung Galaxy by more than 3 times.

How sales of Kindle Fire can further increase? There are 4 basic strategies:

1.       Increase promotion: advertising and incentives

2.       Increase channels

3.       Increase volume at the time of purchase

4.       Manage seasonal inventory 

Amazon usually does not have substantial marketing budgets and uses price as main incentive to stimulate sales. On the number two, news such as Target and some other retailers will stop selling Kindles may mean weaker devices sales. In addition, Kindle Fire today is US domestic product leaving international markets untapped. Taking Kindle Fire to the markets outside the USA can provide strong competitive response and boost sales. On the number 3 promoting a family purchase plan may increase sales. Finally, the holiday season is one of the best times to take advantage of opportunistic shoppers buying gifts.

New iPad: ultra-high resolution and 4G LTE, not smaller

Today is my birthday and Apply decided to surprise me with new iPad announcement. Two main features are:

• Higher resolution screen
• 4G LTE connectivity

New iPad also has 5 MP camera. Apple products are premium and command premium price; such feature additions do make sense. However anticipated smaller screen iPad was not announced but I do expect Apple to be working on it. Despite Tim Cook dismissal of Kindle Fire as direct competitor, Forrester reported March 4^th that Kindle Fire is taking market share from Apple iPad.

Amazon to enter iPad space?

I have written before that Apple is planning to release smaller iPad to enter Kindle Fire market segment. Article in Digitimes reports that Amazon is working with Foxconn on making 10-inch Kindle Fire that "will begin shipments in the second quarter of 2012".

Apple to enter Kindle market segment

Apple has sold 15 million iPad in the last quarter of 2011, well ahead of expected 13 million that happened Kindle Fire went on market. Kindle Fire sold between 4 and 5 million. During the earnings call Tim Cook said this concerning the rival Kindle Fire: “I looked at the data – particularly in the US – on a weekly basis after Amazon launched the Kindle Fire, and in my view there wasn’t an obvious effect on the [iPad sales] numbers”. No wonder. Products address drastically different market segments. This case is similar to MySQL and Oracle database. Users of each would never be using the other produce for obvious reasons. Jeff Bezos said when Kindle Fire went on market there are two strategies: charge more and charge less. Amazon is in the second category and both companies are successful in selling tablets. There is no need for Tim Cook to bash Kindle Fire.

On the other hand if we look at sales per week in the Q4 of 2011 Amazon and Apple has sold about the same number of devices: aprox. 1 million. That may make Apple worry. LA Times wrote that iPad market share of tablets has reduced from 64% to 57%.

There are no indicators that Amazon is trying to move to premium market segment space ($500-$800). Apple on the other hand is reported by Wall Street Journal to be building smaller iPad which will cost less and have smaller screen (the biggest cost in the device).

Kindle pre-sales are on Fire

Blog Cult of Android reported leak info that Kindle Fire orders are getting in at the rate of 2,000 hour and 50,000 day. This is beating iPad and iPad2 upside the head silly with projected 2.5 million orders before the launch. iPad initially sold 300k units at the launch day. iPad2 sold 2.5 million only after the 1 month on the market.
We do not need to wait long.