By now you’ve all seen the rumors of Apple’s October 4th media event. Historically Apple’s newest gizmos would be available 3-4 weeks after the media launch. However, the iPad2 began shipping about two weeks after the media launch and it was my belief that Apple is shortening the window between announcement and availability. Today, AppleInsider is reporting Apple is denying staff holiday requests for 9-15 October which is consistent with an iPhone5 launch on the weekend of October 14th.
Most technology companies are cognizant of how network effects influence adoption, but fail to adequately stimulate these network effects. However, a few recent service launches by Apple recognize the influence network effects can have on the uptake of Apple devices. AirPlay and AirPrint both illustrate Apple’s understanding that the greater the sphere of influence iOS devices can have, the stronger the network effects and therefore the greater the consumer adoption. For example, Canon recently announced they would add AirPrint support to their PIXMA printers. This simple adjustment allows these printers to become more relevant to the iOS ecosystem, but also strengthens the relative position of iOS devices within the broader device ecosystem. Being able to sent content – either audio in the case of AirPlay or print in the case of AirPrint – to adjacent devices like speakers and printers directly from iOS devices strengthens the network effects surrounding iOS devices and will only strengthen the consumer appetite for these devices.
I’ve written in the past about Amazon’s (eventual) entry into the tablet world. Some interesting research from Retrevo consistent with points I’ve made in the past. First, consumers have grown quickly comfortable with Amazon as an OEM. You’ll recall that the original Kindle was panned heavily by critics, but consumers have warmed quickly to Amazon devices.
As you can see from the chart, 55 percent of respondents interested in a tablet say they would seriously consider buying a tablet from Amazon.
The results of the study are also consistent with a point I’ve made repeatedly on differentiation. In order to compete in a quickly crowded segment one must differentiate. It isn’t just that OEMs are competing with Apple in this space – in order to succeed in the tablet segment, OEMs must bring to market something different. They can differentiate by screen size, form factor, feature set, or price. Until now there has been minimal differentiation and I’m not sure there is enough flexibility to compete by differentiating form factor or feature set. There might be large enough segments of the population interested in screen sizes less than (or more than) 10 inches that there is still room to compete by screen size. Ultimately, I think the most likely place to compete will be price (assuming the user experience is comparable). The results of the study suggest half of those interested in a tablet would consider an Android tablet over an iOS tablet if it was priced below $300.
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
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.
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.
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.
What happens when eReaders grow up to be tablets? This morphing is already well underway. Barnes & Noble has always referred to the Color Nook as a tablet eReader – with tablet being the operative word. At their event this week. B&N claimed the Color Nook is the top selling android tablet in the market. Amazon – the current king in e-ink eReaders – is getting set to launch potentially two new tablet-oriented devices. E-ink is actively working to bring to market color e-ink screens and other eReader players are treading towards tablet-like devices. But this evolution has important implications.
First, network economics for text are very different than they are for video and more data-intensive applications. One of Kindle’s opening hallmark features was the ability of the user to download books via the cellular connection without having to independently contract with the service provider. In fact, at one point Amazon switched Kindle cellular service from Sprint to ATT and users never took notice.
This won’t be the case as users gain access to more data-intensive offerings. These services are more bandwidth intensive (and therefore costly) than delivering text over the network. Even though our research has constantly shown most tablet users primarily connect via Wi-Fi, the existing service contracts can’t work when devices are more than books. This will be a key element in the new tablets being launched by Amazon.
App usage on apps-enabled devices will crowd out book usage. This has ramifications for device pricing. In the early days of Kindle, Amazon subsidized the content instead of the hardware. This changed as Apple moved into the book business and subsequently eReader OEMs began selling ebooks at the publisher price and subsidized the hardware prices (or atleast began selling them at very low margin). If the margin is made on the ebooks and their are less ebooks sold as a result of changing use-case scenarios – OEMs will be in search of a new business model to driven margin.
This week Ba
rnes & Noble upgraded the software running on their Nook Color e-reader tablets. Users can now access apps, have email pushed to the device and watch flash videos.
There are a variety of reviews on the web (see: here, here, and here) discussing the anticipated update so here I’ll take a differ tack and discuss two things: what we learn about the evolution of technology in the Nook and what it means for adjacent categories like tablet computers (as opposed to tablet e-readers).
While their initial foray into personal electronics with the original nook might have been more than just an experiment, B&N moved relatively quickly onto the Nook Color. The original Nook was launched in November 2009 and while it was largely sold out during that introductory holiday season, there was likely very little opening stock available. By June 2010 the price had been cut consistent with pricing cuts across the entire e-reader category. Within a year of the initial Nook launch, B&N had a higher-end, full color screen e-ereader tablet and the Nook line collectively was “the company’s biggest bestseller ever in its nearly 40-year history.”
The following was published in Dealerscope Magazine in December 2010:
The last three years have been a volatile period in the history of consumer electronics. While a recovery is slowly taking shape, I believe the next few years will offer as much change as the in the last year or so. Here are a few trends worth watching:
Store-within-a-Store Model Expands
In the late 1990s, Apple’s presence within major retailers began to change, ultimately transforming into the now familiar store-within-a-store model. This gradual transformation pulled Apple products together within the store. Instead of merchandizing Apple products within the category where the products would sit next to similar devices, Apple products were increasingly merchandized next to other Apple products. The retail presence for Apple changed from an existence within categories to one of brand. As the Apple ecosystem of products expanded, so too did Apple’s store-within-a-store presence. While this trend has yet to catch-on widely within the U.S., it is starting to emerge outside of the U.S. for other brands. We’ll see this trend accelerate in the U.S. and beyond.
To create a 360-degree experience (a combination of hardware, software and ecosystem) for consumers, companies are highlighting how the interoperability of their different devices can provide a seamless experience for the end-user. The store-within-a-store model is also expanding slowly as the more traditional categorical view recedes. When devices move away from conventional category definitions, brand becomes the natural organizational default.