The Value of Freemium 0

Some facinating findings in some recently released data from Furry:

Games drive 75% of revenue among the top 100 grossing iOS apps and 65% of this revenue were generated from freemium games.

The average purchase from within free-to-play mobile game is $14

As the chart shows, 71% of all in-app transactions happing within freemium games are for amounts under $10, 16% are for spends between $10 to $20 and 13% are for amounts greater than $20.

Over half of the revenue from in-app purchases happening within freemium games are coming from purchases in excess of $20.

By the end of 2011, Flurry estimates that total U.S. iOS and Android game revenue will surpass $1 billion

 

Lack of Paid TV Subscription Doesn’t Suggest Online Video is Sufficient…yet 0

Leichtman Research Group published a recent study showing eight percent of households who subscribe to broadband don’t subscribe to paid television services.  But within this eight percent of broadband-only homes, only five percent said they do not subscribe to a multichannel video service because they get all of the video they want on the Internet or in other ways.  Two percent of these households did specifically mentioned Netflix as a reason for not subscribing to a multichannel video service. A large percentage (28 percent) cited cost and 26 percent claimed they didn’t watch much TV. Read more here.

The Future of NetFlix and How They are Working to Enrich Their Streaming Service 0

 Earlier this month NetFlix increased the price of their subscription offerings (read more here and here).

And then earlier this week, NetFlix reported Q2 earnings.  You can read the Letter to Shareholders here.  NetFlix closed the quarter with nearly 24.69 million subscribers – a 65 percent jump from the year-ago period.  Netflix expects to finish the third quarter with 25 million subscribers – 12 million taking the hybrid service, 10 million choosing streaming only and 3 million subscribing to the DVD-by-mail service.

The future of the company is clearly streaming.  In the letter to shareholders Netflix reported 75 percent of its recent subscriber gains were to the streaming only service. They also wrote, “With the rapid adoption of streaming, DVD shipments for Netflix have likely peaked. Also, in Q2 the total number of subscribers who were on hybrid plans (and, therefore eligible to receive DVDs) declined slightly from Q1 (emphasis added).”

I don’t view the price increases as grab at revenue growth explicitly.  Rather I see it as a push to keep the streaming service relevant. In order for the streaming service to remain relevent (and ultimately prosper) NetFlix needs a rich, deep, and current catalog. This is clearly a focus.  Again quoting from the letter to shareholders:

We’ve spoken frequently of how we are directing savings generated from declining DVD demand into additional streaming content and marketing. During the quarter, we substantially increased sequential spending on streaming content as titles from our new content deals (discussed below) became available for streaming.

State of the Mobile Internet 0

Some interesting tidbits here from Akamai (with the full report here).  My comments are in Bold.

  • The average monthly 3G traffic is the highest for laptops (1-7 GB), followed by tablets (250-800 MB) and smartphones (80-600 MB) ->  not surprising

 

 

  • On tablets & smartphones, online audio, e-mail, software downloads, and social networking traffic are big consumers of 3G data traffic. -> great story for Pandora, staying connected while on the go (email, social networking traffic), and filling voids in your time or discovering apps in social settings and downloading them immediately (app downloads)

 

  • Tablet and smartphone devices usually have frequent and short sessions typically during the whole day, sometimes showing a periodic nature. -> consistent with my thesis – consumers grab the “best” device for a given activity when that device makes sense because of some product attribute.

 

  • Laptops are usually on mobile connections for a few longer sessions, mainly during daytime and the evening -> not surprising, driven by production which is happening during large blocks of time

 

  • Tablet traffic patterns over 3G mobile networks are much closer to smartphone traffic patterns than to laptop traffic patterns -> tablets are above scaling a specific aspect of mobile phones (the screen size) so usage scenarios are similiar.

How Impactful is Verizon for RadioShack and RadioShack for Verizon 0

By now you’ve read the news that RadioShack (RSH) will stop carrying T-Mobile devices on September 14th and start carrying Verizon devices on September 15th.  If you missed it you can read more here: (Reuters, TechCrunch, Engadget). How impactful might this be for both Verizon and RadioShack?

Let’s start first with RadioShack.  Despite poor results, the stock was up big on the news – closing up nearly 20 percent.  Clearly the markets think this is a positive move.

Verizon is the largest wireless carrier in the US with about 31 percent of the market – followed by AT&T with 27%, and T-Mobile and Sprint with about 12 percent each. A shift from T-Mobile to Verizon should give RadioShack access to roughly 17.6M additional households. More, the trend is positive with Verizon enjoying net subscriber additions. Verizon has roughly 85,300 postpaid connections while T-Mobile has about 40 percent of that sum (33,600 postpaid connections). This deal gives them access to over 50K more postpaid connections – an increase of over 50 percent.

About 45 percent of RadioShack‘s revenue comes from their mobility platform which includes postpaid and prepaid wireless handsets, commissions and residual income, prepaid wireless airtime, e-readers, netbooks with embedded network capability, and tablet computers.  Nearly 70 percent of this revenue comes from upfront commission revenue and residual income received from wireless service providers.

Bullish on Apple? Bullish on China 0

One can’t help but be bullish – at least a tinge – on both Apple and China.  From a recent NYT article:

Last week, Apple reported blockbuster sales and profits in its third quarter, including $3.8 billion in revenue in greater China, which includes Taiwan and Hong Kong.

For the first three quarters of Apple’s fiscal year, revenue in greater China was $8.8 billion — six times that of a year earlier.

 

What the Secondary Market Tells us about iPad Availability 0

I recent wrote how I wasn’t sold on the premise that Apple’s quarterly iPad sales figures are largely influenced by supply chain dynamics. This morning I took a quick look at the secondary market for (used iPads).  I didn’t perform an indepth study, but even a precursory examination tells an interesting story.

First, here are the current prices for new units from Apple:

[table id=9 /]

These were of course the same prices for the original iPad until it was superseded by the iPad 2.  There is also no price differential in the primary market for color – though as you will see there is some indication of a price differential for color in the secondar market.

As a proxy for the secondary market I pulled pricing data from closed eBay listings where there was at least one bid.  I ignored Buy-It-Now and Best-Offer auctions.  This was in no way a thorough exercise.  I pulled information for the most recently completed auctions and in total only pulled about 1,000 listings.  Included in these were results for 16GB and 32GB models, for Wi-Fi only and Wi-Fi + 3G models, for both first generation and iPad 2 models, and for the iPad 2 listings I included both Black and White models. Finally, I only included used models though I didn’t go to great lengths to check the descriptions of each item so item pricing might be influenced by other aspects of the auction listing like included cases or accessories or differential shipping costs.

Here are the data from the secondary market:

[table id=10 /]

[table id=11 /]

A few take-aways from the tables below:

1) iPad 2 models sell for a higher price in the secondary market than their predecessors. On average, iPad 2 models sale for 30-40% more than first generation iPad models. This is logical enough. Devices have a given level of durability and I doubt the iPad and iPad 2 models experience a differing degree of durability. The iPad 2 models sold in the secondary model are likely newer on average than the original iPad models sold during the same time period. Thus, less of the durability has been exhausted on these models. Moreover, the iPad 2 has additional functionality including a camera, thinner form factor, and color options.

2) There is a premium for Wi-Fi + 3G models over Wi-Fi only models. There is a small 5-10 percent premium for models with 3G capability. This relationship appears to hold for both the original iPad models as well as the iPad 2 models. This is consistent with point #1 above. The Wi-Fi + 3G models include GPS functionality while the Wi-Fi only models do not. Therefore, regardless of one’s intention to activate the 3G service, the Wi-Fi + 3G models are more feature rich.

3) There is generally a premium for White iPad 2 Models. There is generally a small 5-10 percent premium for the white iPad 2 model over the black iPad 2 model.  This shows the value of differentiation.

4) The premium for 3G capability is lower in the secondary market. For new iPad models, consumers will pay a premium to have 3G capability (and GPS consequently functionality). This premium is 22 percent for the 32GB models and a 26 premium for the 16GB models. As I pointed out above, the premium in the secondary market is closer to 5-10 percent. This result could be driven by heterogeneous audiences – with those buying new iPads more willing to pay a premium for 3G connectivity. However, I doubt this explains the entire difference.

5) Wi-Fi Only models maintain a higher percentage of the original MSRP than Wi-Fi + 3G models. This holds for both original iPad and iPad 2 models and for both 16GB and 32 GB models. For example, 32GB iPad 2 Wi-Fi Only models sell for 90 percent of the MSRP in the secondary market compared to 75 percent of the MSRP for 32GB Wi-Fi + 3G models. Again, this could be caused by heterogeneous customer segments, but I don’t believe this would explain the bulk of the entire delta.

Again, I only pulled about 1,000 observations and did some basic data cleaning, but in now way performed a fully encompassing data cleansing.  These are rough estimates that could change (even significantly) given more attention to the data.

Still, I think it shows that important dynamics.  If supply constraints were having a large impact on demand I would expect to see higher prices relative to MSRP in the secondary market. More, as  I wrote earlier today, the higher discount rates for Wi-Fi + 3G models in the secondary market suggests a more full equilibrium between supply and demand on a model basis will result in a lower average price point, with a higher share of Wi-Fi Only and 16GB models generally.

How Might Apple iPad Shipments Change Over the Next Year 0

Much has been written about the relationship between iPad supply and demand.  I’ve added to that discussion here. What I haven’t seen discussed much is how iPad sales might change now that supply and demand are finding equilibrium. As I wrote, I don’t believe supply constraints have defined aggregate unit volume.  But I do think it might have influenced allocation across models within that aggregate volume.  Nielsen recently suggested about half of iPads are of the 3G variety.  This seems consistent with the fact that Apple has to-date sold most of what they’ve made available for sale and I’ve heard that they are spreading supply roughly equally across their models.

In fiscal Q2 (calendar Q1) Apple sold roughly 4.69 million iPads.  If roughly half were 3G models – then Apple sold about 2.35 million 3G models during the quarter.  But examining the financial releases from ATT and Verizon suggest they collectively activated only about 700k tablets during the same period. If these stats are close, then many who are buying 3G-enabled tablets are not actually using the 3G service.  Sure, some are buying it “just in case” and some will perhaps activate it at some point.  But there appears to be a large pool of owners who aren’t and likely won’t be using the 3G service unless usage patterns/scenarios change significantly.

As GigaOm reports, in their recent quarterly conference call “Cook went as far as to say that in some markets they (Apple) had actually caught up and were able to be in some sort of an equilibrium with demand and supply they had actually caught up and were able to be in some sort of an equilibrium
with demand and supply.”  If supply and demand are finding an equilibrium then buyers will presumably be able to buy the exact model they are interested in.  Taken together with the relatively low activation figures suggests the tablets to sell in the future will be predominately Wi-Fi models.  This suggests a lower average price point.

Are Apple’s Strong iPad Numbers Just a Supply-Chain Story…. 0

Last week Apple blew away (nearly) all expectations for fiscal Q3 iPad sales.  I hate saying, “Apple always exceeds expectations” because that just suggests estimates are consistently and systemically biased downward but they did far exceed fiscal Q3 iPad estimates after not accomplishing that feat in fiscal Q2. Analysts estimates for fiscal Q3 iPad sales ranged from 6 million to 9.5 million with an average estimate of roughly 8 million. Apple ended-up shipped 9.25 million iPads during the quarter.

A recent GigaOm article implicitly suggests the strong growth seen in fiscal Q3 is a result of supply chain dynamics:

” Apple admitted earlier this year that it couldn’t make iPad 2s fast enough to keep up with demand. Now Apple is still selling “every iPad 2 it makes,” but it also said it was able to make more iPads 2s during the most recent quarter than it did in the same period a year ago. So while demand is still ahead of supply (“Sales of the iPad 2 have been absolutely a frenzy,” said Cook), they’re getting closer to meeting it. Cook went as far as to say that in some markets they had actually caught up and were able to be in some sort of an equilibrium with demand and supply. He did not, however, expand on which markets.”

In other words, Apple out-clipped expectations because the supply chain finally caught up.  This has been common rhetoric throughout the lifespan of iPads. Demand has been strong, supply has failed to keep up, and unit volume would be much higher if supply could have kept up with demand.  Certainly this rhetoric was made by many after fiscal Q2 iPad sales failed to meet expectations.  After selling 7.33M in fiscal Q1 (which includes the ever important holiday season) most analysts (myself excluded) expected sequential growth for fiscal Q2. When Apple shipped only 4.69M in the quarter, many analysts blamed a lack of supply.

But would unit volume really higher had supply been more robust?  Does this logic make sense?  I don’t think it does.

There has definitely been strong demand for the iPad. This was true for the first generation as well as the second generation (iPad2) models.  Throughout the last year+ buyers have on occasion had to wait to receive their iPad. At times, they even had to wait 2-3 weeks for their purchase to ship. Others, wanting a specific model, opted to buy a different model so they wouldn’t have to wait. Some bought a 3G model or a black model or a 64GB model even though they wanted something else – simply so they wouldn’t have to wait.

So yes its true supply hasn’t perfectly kept up with demand.  This is true with any successful product – especially a nascent device. Its even possible that some delayed making any purchase until they were able to immediately get what they wanted.  But I doubt we had millions of potential customers delaying their purchase.  It seems to defy logic to suggest some waited to buy an iPad because they didn’t want to wait 2-3 weeks for it to arrive.  In order for fiscal Q2 to show sequential growth, Apple would have needed to have sold an additional 3M+ iPads in the quarter.  Its tough to believe 3M people opted to delay this purchase because they didn’t want to wait.  Moreover, evidence suggests delays of 2-3 weeks at most.  3M+ individuals waiting in line would have resulted in months of delays (remember they only sold 4.69M during the entire quarter).

Another inconsistency.  In the same conference call Apple discussed supply shortages, it also discussed opening new geographic markets to iPad sales.  When supply is extremely curtailed, OEMs typically delay opening new geographic markets.

In short, I don’t buy the argument suggesting supply “shortages” are driving these quarterly results. Calendar Q1 (Apple’s fiscal Q2) is a seasonally slow period – especially for new technologies.  Strong growth in Apple’s fiscal Q3 is a result of the natural laws of adoption.  More individuals have been exposed to the technology and they’ve now had multiple exposure points.  More markets are now open to iPad sales. Supply constraints have perhaps influenced results on the margin, but they aren’t driving the uptake of iPads.

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