Later today, Apple will report Q1 figures.  We know much has changed in the tablet market over the last three months.  Earlier this week, Pew Research Center’s Internet & American Life Project reported tablet and eReader ownership (unsurprisingly) surged during the 2011 holiday season.

This is consistent with what I expected (and subsequently reported) following Black Friday and the (unofficial) start of the holidays. Starting with Black Friday (but really through the entire holiday season) several things too place to help drive tablet sales.  First, prices came down significantly.  Prices for many of the “high-end” tablets were marked down significantly and lower priced tablets entered the market in calendar Q4.  A declining price helps up-take.  Secondly, both devices have been in the marketplace for 18+ months and are moving quickly into mass market appeal.  We are moving into the fat part of the adoption curve.  Finally, tablets were the loss-leader for many retailers on Black Friday.  While the volume wasn’t high on a single-store basis, in aggregate there were a plethora of tablets (from a variety of OEMs) bought during the weekend across a myriad of retailers from Best Buy to Big Lots to Radio Shack to Staples, to ToysRUs.  CEA estimates 14 percent of those who purchased tech over the weekend bought a tablet – up from six percent in 2010. eReaders also did well over the weekend with an estimated 15 percent of tech shoppers buying an eReader.  This figure is up from 13 percent in 2010 and two percent during the 2009 Black Friday weekend.

According to Pew, both tablets and eReaders are now owned by about roughly 1/5 of the US population.  More than a third of those living in households earning more than $75,000 (36%) now own a tablet computer and almost a third of those with college educations or higher (31%) own tablets.

Amazon is now a library – sorta. Last week, Amazon launched the Kindle Owners’ Lending Library which gives Kindle users who own an actual Kindle device (and not just use the Kindle app on other devices) AND are Amazon Prime subscribers access to 5,000+ books they can “borrow.” A few things worth noting:

1) this is probably the first example of a subscription service for digital books.  We have subscription services for other digital content (music, video, games) so books are a logical step. I assume all digital content will eventually be available either through a unit price or through a subscription service.

2) Amazon is quickly making all of their subscriptions a part of their Prime offering.  Prime subscribers now have a digital video subscription (instant streaming of movies and TV shows), a digital library subscription, and a free two-day shipping subscription. With each addition, Prime subscription becomes more attractive to two audiences, the first audience is the group that actually wants the new additional offering and the second audience is the group that finds the new addition attractive on the margin (and of value when coupled with the entire suite of services).  Ultimately this raises the number of overall Prime subscribers which in turn provides Amazon with more collective bargaining power and consequently the ability to increase the value of what is offered.  In other words, Amazon can go to the studios or publishers or whomever and say, “hey we have XXX million subscribers to our video/book/fill-in-the-service and we’d like you to do/provide/settle for….”

Last week Kindle announced their move into the libraries.  You can read more here: (press release, NYTimes article, Kindle site on how it works).

There has been much talk in the past how Kindle, and eReaders generally, will play an influence role in education.  This move into libraries will serve as an important catalyst.  It will be years before eReaders become widely leveraged within library systems nationwide and years more before they become widely influential within public education nationwide but this marks an important first step (read the Economist’s recent Great Digital Expectations for a view on the current ebook landscape). While we are losing traditional book vendors, ebooks through libraries and hardware through other retailers will help drive adoption (RadioShack recently announced they would expand their eReader offerings).

Kindle books are now available at my local library and I’m testing the experience now.  Kindle is enabling me to retain any notes or highlights, but importantly Kindle will also retain this information. As I’ve discussed before, this strengthens Kindle’s approach to social.  More data creation will make a more valuable platform.  It may also help sell more eBooks though I think the jury is still out on this particular aspect.  If a user buys a book they borrowed from their local library, their notes and highlights will be updated in their purchased copy.

Many libraries are now working through the demand implications of a changing book environment.  Many are allocating more dollars to their ebook collections and updating the borrowing window.

 

 

 

 

IHS iSuppli recently projected sluggish growth for single-purpose consumer tech devices like MP3 players, PNDs, and digital cameras.  At the same
time they expect multi-function devices like smartphones and tablets to enjoy strong double-digit growth over the same horizon The IHS iSuppli statement quotes, Jordan Selburn as saying,

The success of multipurpose electronic equipment, often coming at the expense of devices dedicated to a single task, is reshaping the landscape of the consumer electronics industry… In many cases, users can replace a slew of dedicated systems with just one multipurpose device, gaining functionality and portability while simultaneously saving money… The story of consumer electronics is an ongoing survival of the fittest, and multi-tasking systems such as media tablets will have a hand in turning yesterday’s hot consumer electronics gear into tomorrow’s fossils,

While their trends and predictions are all directionally accurate and something we’ve been pointing to and discussing with clients since early last year as we’ve tracked the monthly OEM data, I think IHS iSuppli and Selburn are overly strong on the causality of these declines.

What is primarily driving the decline in these categories are the individual structural issues these categories face directly.  For example, according to CEA Research, digital cameras are owned by 79 percent of households and these households own on average 1.8 digital cameras.  Eight-nine percent of self-identified early adopters own a digital camera and even 73 percent of self-identified late adopters own one.  Fifty percent of the households who do not own a digital camera say they’ll never buy one – suggesting we are extremely close to full market saturation for this category.  Digital cameras will never be owned by all households and this has nothing to do with the introduction of other devices.  Very few products ever enjoy 90+ percent ownership rates. The primary decline in digital camera sales isn’t necessarily what is happening in other categories – it is a function of what is happening in the camera category itself.

PND growth slowed and then outright declined largely because the technology is increasingly integrated into vehicles.  I suppose the argument could be made that this is the ultimate multi-function device.  MP3 players are owned by half of US households. We know MP3 players aren’t  for everyone.  In fact, 56 percent of non-owners still say they’ll never own one. Despite the fact the technology has been in the market for over a decade, only 37 percent of self-identified late adopters own one. Here again, the category declines as a result of hitting market saturation and not necessarily because there are alternatives.

Certainly, single purpose devices are impacted by Swiss Army Knife-like devices. Calculators likely have lower replacement rates (and subsequently growth rates) because of the ubiquity of computers. Multi-function printers represent a large share of the computer printer market.  And I’m sure paper calendar
sales have slowed since the introduction of digital alternatives. Some of these changes might be more a result of living in an increasingly digital world than as a
result of multi-function device substitutes. Still, the impact is noted. About a quarter of the households who own a digital camera say they’ll never buy another digital camera. This rate is consistent with many other products (18 percent of households owning a smartphone say they’ll never buy another one). Still this result does suggest some households will not replace/upgrade their digital cameras because of alternatives.

Single-purpose devices have through the history of technology existed – even with the entry of multi-function devices. Single purpose devices have (and always will have) an important place in the market. The article/report cites Cisco’s decision to shutter Flip.  By all accounts, Flip was highly successful. It was profitable and owned 40 percent of that market.  Cisco closed the business unit to send an important message to the market generally and shareholders specifically that they were committed to moving away from experiments in adjacent consumer businesses and return a full focus within their core enterprise business.  Despite high ownership rates of digital cameras (most if not all of which shoot video), Flip was able to do well.  It did one thing and it did it well.

e-Readers are another great example of a single-purpose device that can thrive despite the introduction and existence of multi-function alternatives.  e-Readers continue to grow rapidly despite the success of products like the tablet and the smartphone – both of which enable mobile/portable reading.  Recent research shows consumers have a very low interest in considering other devices when they shop for an e-Reader – suggesting consumers largely find no alternatives to an e-Reader.

These are just a few examples of devices that have (and continue to) do well despite the introduction of new multi-function devices.

At the end of the month, Toys“R”Us will begin selling Amazon’s Kindle (see Retailing Today, Mashable, Reuters, LA Times). This is a natural extention of its existing non-Amazon retail strategy (which already includes Target, Best Buy, RadioShack and AT&T stores). More importantly, I think it targets an important segment of the population primed for an e-reader experience but who haven’t had the chance to express that interest.

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 Barnes & 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.”

Last week I provided an estimate of the implied revenue Amazon expects to earn in advertising from the newly discounted Kindle with Special Offers. I happened to catch MG Siegler’s post on TechCrunch on the same topic.  Siegler takes an approach I heard frequently immediately following the announcement, namely that $25 isn’t a strong enough discount.  Amazon should have been more aggressive and marked the device down to $99 – then we’d be talkin’.

I agree with Siegler that this is part of a broader pricing experiment for Amazon.  Amazon loves to experiment with pricing (among other things) and by so doing they can more accurately estimate demand elasticity (among other things). Thus, the recent price cut could have simply been an info gathering exercise. On the other hand, Amazon has on several previous occasions cut the Kindle price so I imagine they have a good handle on the shape of the demand curve as well as demand for ebooks (additional books sold) as a result of additional devices moving into circulation. As I wrote, Amazon could have arbitrarily picked $25 – it is after-all a very round number.  In this spirit, I don’t agree with Siegler where he suggests Amazon “must have looked over the potential numbers from advertising and determined that $114 was as low as they could go.” They could have gone lower, but opted not to. And I don’t think that decision was heavily influenced by per unit revenue loss rates.  

Amazon recently announced they would sell a new Kindle with “Special Offers”version.  Kindle with “Special Offers” has the same specs as their WiFi-only Kindle but will include advertisements as the screen saver and on the home screen bar.  In exchange, Amazon will only change $114. 

In all likelihood Kindle hardware will one day be free (or close to free) because of cross subsidization (give away the hardware and monetize the content). The Kindle app for other devices is logically already free.  And of course, this go-to-market approach is common for other technology categories like gaming.  Gaming hardware doesn’t drop to zero likely in part because of the retail relationships that must be maintained by the OEM, but it isn’t uncommon to see it sold below cost at different times. With Amazon’s Kindle in other retail channels, this might be the approach Kindle takes.  You also don’t want consumers taking more than they’ll use.  With a registered Kindle account this becomes less of a concern.  I won’t be surprised if the Kindle with “Special Offers” remains exclusively available through Amazon because of the confusion it might cause in other retail chains which might help drive volume back through Amazon.