NQ Logic

Technology | Strategy | Consulting

iPad, or Apple’s Connected Consumer Strategy

On Wednesday, January 27, at the Yerba Buena Center for the Arts in San Francisco, Apple revealed the latest product from its collection of consumer electronic devices [Video]. Qualified by Steve Jobs himself as the "most important thing [he has] ever done," expectations were quite high for a company that has been considered by many has a market leader in consumer electronics.

For once, the frenzy was fueled by the company executives themselves on various occasions. Apple’s official and consistent reputation for never talking about unreleased products was broken during the quarterly revenue announcement on Monday, January 25. This is quite unusual for the most secretive company of the Silicon Valley, which generally manages product launch hype through controlled leaks.

" Is There Room for a Third Category of Device in the Middle? "
[Steve Jobs, Jan 27, 2010]

Apparently Yes. The iPad is a 9.7-inch (diagonal), LED-backlit, sleek, widescreen Multi-Touch display with IPS technology. The new product weighs 1.5 pounds (0.68 Kg), has Wifi and Bluetooth technology built in with optional 3G connectors. The 9.56 inches (24.28 cm) by 7.47 inches (18.97 cm) device supports a 1024-by-768-pixel resolution screen. Powered by a new proprietary processor called A4 (certainly built by PA Semi which was purchased by Apple for U$278m in April 2008), the Apple’s gadget with its 10 hours of battery life, 16-64GB of Flash memory storage and starting price at U$499 is on par with current major competitors in the market.

The tablet is running the new, yet-to-be released iPhone OS 3.2 and is coming with iWorks, photos, videos, music, emails and Internet browsing applications; App Store and iTunes compatibilities and a new iBooks store for buying and reading eBooks.

AT&T will be offering for the American market a 250MB data plan for U$14.99/month, or unlimited data for U$30/month, without an annual contract, giving nationwide access to all their Wifi hotspots for free. Most international connectivity plan offering will be in place around the time of shipping, in April-June 2010.

Apple highlighted during the presentation that the New York Times has designed a new application for the iPad; that Electronic Arts and Gameloft have also already ported some video games to the tablet and that five major publishing companies have already signed a deal with Apple to give access to their catalogue: Pearson’s Penguin Group, News Corp.’s HarperCollins, Hachette Book Group, CBS’s Simon & Schuster and McGraw-Hill’s Macmillian. All eBooks will take full advantage of the official EPUB standard from the International Digital Publishing Forum (IDPF).

Some commentators are already pointing out the missing components that would have made the tablet a truly revolutionary all-in-one device. But even without a camera, a handwriting recognition software, Flash support, few USB ports or a controversial name, the iPad is already a well designed and interesting content consumer device, at least on video.

Remember Newton

This is not the first time that Apple (along with AT&T) tried to launch a device in the middle market, (between the phone and the computer). In 1983, Apple and AT&T already teamed up to work on a touch screen device and asked Frog Design to prototype it. Steve Jobs was Apple’s creative director at the time. The "bashful" (named after the Dwarf in Snow White story-book) was a tablet computer prototype developed in various versions, one including an attachable keyboard and a stylus, one with a floppy disk drive and handles for limited portability, and another one with an attached phone (sound familiar?). Greatly influenced by Jef Raskin and his "information appliance" concept, Steve Jobs decided to create a radically different kind of computer, one that was designed from the start to be easy to use.

A few years later in 1989, Apple concentrated some of its development forces to create a line of Personal Digital Assistant (PDA). The idea behind the PDA's Newton hardware and software platform was to create an electronic gadget that could recognize your handwriting, act as your diary and offer very basic computer applications. Ultimately most MessagePad devices released from this Newton platform were pre-loaded with proprietary software (Notes, Names, and Dates) to manage personal data and organize information.

Unfortunately during its almost ten years of existence, Newton was a compilation of hardware failure, software inaccuracies, and slipped shipping dates. Bad press, awful market penetration and a too-high price point surely lead to the end of its production in February 1998, killed by the returning CEO... Steve Jobs himself. Newton was spun off into an Apple subsidiary company, Newton Inc., and reabsorbed several months later when Steve Jobs fully resumed control of Apple. It could be interesting to note that two ex-Apple Newton developers founded Pixo, the company that later created the original iPod’s Operating Software.

In 2005 FingerWorks, a gesture recognition company, was acquired by Apple. The company produced a line of multi-touch products including the iGesture pad and the TouchStream keyboard, whose technology has been re-used since then in the latest version of the iPhone. Over the recent years numerous rumors mentioned that Apple was really close to offer the long-awaited tablet computer, but nothing materialized until this week.

Not the Only Tablet Company Out There

Tablets have been around in various forms for two decades now, and Apple was not the only company working on the tablet concept. Palm Pilot and Microsoft were at the forefront of the innovation curve on this particular product line.

Tablet is "a PC that is virtually without limits and within five years I predict it will be the most popular form of PC sold in America" – Bill Gates, ex-Microsoft's CEO [Apr 21, 2006]

Unfortunately, Microsoft Windows tablets were not a commercial success, and only found its niche with health care and insurance practices. In reality the device never took off because consumers didn't see any advantage of using an expensive replica of their laptop, simply to use a finger or a stylus as an input mechanism.

But still, manufacturing companies such as Sony [VAIO Tablet PC], HP [Pavilion TX2500Z], Lenovo [ThinkPad X200 Tablet], ASUS [Eee PC T91], Dell [Latitude XT2], Wacom [DTZ Series], Samsung [Q1UP-V], Fujitsu [LifeBook T5010 Tablet PC], Toshiba [Portege M750], and Panasonic [Toughbook T8] have offered many different versions of the tablet PC over the years based on a modified version of the Windows OS. The user interface was merely migrated over from the Windows PC world to tablet computers.

Today the tablet computers are a niche product, sold mostly to industrial and commercial buyers. They account for less than 1% of notebook PCs sold worldwide annually, or 1.3 million out of 140 million [Gartner]. But Apple is a different company altogether and can navigate where so many have failed before, finally providing the ultimate device to all Americans who spend 11.8 hours per day on average receiving information at home [UC San Diego's Global Information Industry Center].

Apple the Company

It would be difficult to tell the story of Apple without mentioning Steve Jobs at one point. Today Apple is much more working for Steve Jobs, than Steve Jobs is working at Apple. Since his return in 1997, Steve has managed to turn around an engineering company into a business empire, moving from a high-end product company to a high-end customer experience design and service company.

At the time of his return, the company had captured U$7 bn in revenue and was losing U$1 bn. The company was worth about U$4 bn, and competitors like Dell and HP were worth about U$8 bn and U$62 bn respectively. The last financial year 2009 saw Apple capturing U$36.5 bn with a net profit of U$8 bn. The company is worth more today (U$182 bn) than HP (U$118 bn) and Dell (U$27 bn) combined together.

The Fortune magazine's CEO of the Decade has managed over the past 10 years to re-center a troubled company around the idea of the "digital lifestyle" strategy. Along the way, Steve changed, besides Apple's original market play (the computing business), three other markets: the music business, the movie industry and the telecommunications business.

The most recent "all-time highest revenue and profit" quarterly release is a perfect example of what a device technology company can achieve with a marketing guru at its reigns. Over the past 33 quarters (since Q1 2002) Apple sold 50m Macintoshes, 250m iPods and 42m iPhones (which is the equivalent to what Nokia sells in a month), accumulating U$160 bn in revenue. The 283 Apple stores around the world saw 50m visitors in the past quater. iPhone owners downloaded 3 bn applications in the past 18 months and over 12 bn downloads were done through the iTunes software in the last eight years. With U$39.8 bn in cash and short-term investments on its balance sheet, and a single digit market share outside MP3 players and SmartPhones (with plenty of growth), the company is ready to tackle any market it wishes to venture into.

iPad Market Outcome

It is quite astonishing to witness Apple entering another overcrowded device market, and the skeptics of this world have sufficient ammunition to propagate their rightful doubts around the planet internet about the feasibility of this latest tablet venture.

On the other hand, some more optimistic analysts predict that with the accurate service offering and the low price point, the Apple tablet could easily capture U$3 bn in its first year of launch, pointing at the competitors who are rushing today to get out on the market their own production [PlaysForSure players, the Zune, the LG Prada, and the Palm Pre].

For sure, if there is one company who can succeed in such a market that would be Apple, because the company [1] did already successfully capture the majority in an already crowded MP3 player market after a very late entry; [2] has enough brand appeal (if not brand lust) with consumers for another success story after the iPod and iPhone; and [3] has enough cash on its balance sheet to market any product, anytime, anywhere to anyone.

Only time will tell if Apple has managed to crack the middle device paradigm, and even if they did not at their first attempt, you can be sure that the Silicon Valley company will correct the trajectory soon enough to become a dominant market player, if consumers would want another electronic device in their lives. But the truth resides somewhere else.

Apple’s New Digital Strategy

What Apple is doing is not merely launching a tablet device, but is finishing its digital strategy execution that started 10 years before, which is to connect high quality digital contents and experiences to Apple devices only, becoming the ultimate middleman between the media cloud and Apple consumers.

In its early attempt in 2001, Apple managed to create a direct experience with consumers in giving them a unique music paradigm through the iPod device, with which fans could store high quality songs accessible through an easy-to-use, secure and economically priced iTunes. With the iTunes software, Apple helped music labels to understand what the digital music retail potential could be, and to realize the limitation of DRM encryption to restrict piracy.

In 2007, the second attempt was with AppleTV, with which the company managed to distribute high-definition digital movies and TV shows to consumers' TV through a single equipment, finally converting Hollywood to digital world in people's homes. Consumers purchased the movies and TV shows via iTunes, where iTunes could be their single point of media acquisition.

The same year, the third attempt was done with the iPhone, with which Apple managed to align large telecommunications companies around the world to offer an appealing service plan, and offered a great user experience and functionality, switching many consumers to mobile data connectivity.

In 2008, the fourth attempt was with the iPhone Application Platform, with which the company was the first to open the application platform for the mobile industry, following the successful open application platform by Facebook for social networks. This gave a place for developers to build and sell their own applications to the iPhone users.

With the launch of the iPad, Apple is not going after the device market itself, but rather the missing content that has not been captured so far by the company: Books, Games, and soon Newspapers.

Apple is now bringing the content rights owners to the iTunes retail mechanism under the "Agency Model". Contrary to the Amazon.com wholesale model, Apple is letting the content rights owners to sell directly their content at the price they want, with Apple taking a 30% commission on the transaction. The business idea is more appealing to content rights owners because they can now control the price, the time of the distribution and the quality of the content while relying on Apple's high level of customer experience for the payment, delivery and management (customer service) of the content.

At the same time Apple understands that a non-connected device is a dead device, and has managed to force AT&T to propose an all-you-can-eat, pre-paid mobile data plan similar to what Internet Service Providers have been proposing for years, moving away from the locked-in two year plan. The recently announced lift of the ban over 3G VoIP service on the iPhone (and therefore iPad) could be the stepping stone for free phone calls for everyone.

By creating a seamless, high quality customer experience 'one stop shop' for all digital entertainment content, Apple is creating a marketplace in which all content compete with each other, eventually forcing by “network effect” the remaining content rights owners to give access to their catalog.

Thanks to Apple's vertical integration across the entire stack (hardware and software), its intuitive and consistent user interface, highly attractive designs and ubiquitous presence in the consumers' life, Apple consumers can choose with which devices the content will be consumed, when and where they want.

What's Next?

With the launch of the iPad tablet, Apple has managed to offer to a small consumer segment (the early adopters) all digital content across all consumer devices, charging a high price for hardware, software and content. Apple has managed to become the ultimate digital go-between company for high quality and high price content in a small yet very affluent segment of the population.

Apple’s digital lifestyle strategy could easily be seen as a central piece of hard drive (AppleTV or Macintosh), a home remote control (iPad), an internet connection, a voice device (iPhone), portable music device (iPod), and retail mechanism (iTunes), creating the ultimate connected consumer of the future. The next steps will be for the company to bring more digital content and increase its market share, and we know that Steve Jobs can deliver on both of these.

Apple with its both closed and integrated business concepts has successfully managed to convince major content providers to finally move safely to the digital world. Even though history is telling us that closed and expensive digital solutions have difficulties competing in the long run with more open and collaborative systems, at least we can recognized that Apple is the first mover with the competitive advantage to aggregate all media for consumers… at least for these first few years.

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