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Apple iPad: Business Model Analysis

Summary: What is the true significance of the iPad? A 'solution in search of a problem' or a ‘revolution in a tablet’? An analysis of Apple's strategy and business model, as it relates to digital publishing and the dangers for telcos. (February 2010)

Introduction

After months of fevered speculation, the launch of the iPad was always going to struggle to live up to expectations. Press reviews have been mixed with biggest question being "Do I really need one?"

This note, published just after the iPad was launched, examines the impact for the players across the Telecommunications, Media & Technology landscape. There will be further analysis of Apple's business model, strategy, and how to deal with it in keynote presentations at the 2011 Telco 2.0 Executive Brainstorms in Americas, EMEA, and APAC, and online at Best Practice Live! on 2-3 Feb, and in our adjacent players research stream. We also cover Apple in the context of digital entertainment here.

Executive Summary

The iPad is a strategic play by Apple to dominate the online publishing and distribution ecosystem from its own device-centric platform. It contains two significant innovations:

  • First, as you might expect from Apple, the user interface has been developed above and beyond that of a PC / netbook to enhance the intuitive experience of reading online.
  • Second, and perhaps of most interest, is that the iPad presents compelling business model opportunities to the content industry, especially publishers and gamers. Apple is offering an alternative to the de-facto advertising funded web business model and this may be its most powerful innovation.

Apple’s business model is based on pushing the value chain towards the device, whilst processing transactions at marginal profitability for upstream content providers. The worrying aspect for telecoms operators is, at the launch stage at least, that the connectivity proposition above and beyond Wi-Fi appears to have been added as an afterthought.

The challenge for the telecoms industry is where to play in this ecosystem in a way that integrates more effectively with the user experience, and creates more compelling and value-adding propositions for content creators, publishers, aggregators, and end-users. (NB. We've previously addressed this strategic issue in the Telco 2.0 Strategy Report The Online Video Market Study.)

The Telco 2.0 team believes the iPad will have slow-burn appeal, initially to the existing Apple brand fan base, and competes most directly at this stage with the upper tiers of the netbook market. Noted commentator and comedian Stephen Fry sums up the iPad as "a transformative device. You only really get it when you get your hands on it." If he's right, the device and its business model may prove to have much wider appeal in the long term.

Bizarre 3G pricing

US$130 for a 3G modem seems deliberately priced not to be attractive. It pushes up the price of the entry level 16GB device from US$500 to US$630. Both a significant 25% increase and breaking a psychological barrier of US$500. Potential purchasers are almost being deliberately asked to question whether they would use the iPad outside of the home and really need more than Wi-Fi access.

Targeting home use first...

The expensive price of the modem cannot be explained by the cost of silicon which we are reliably informed can be as low as US$10 for "decent" sized orders. This price is before 3G patent royalties which are incredibly complex to negotiate and something of a black-box. Whatever the reason for the expensive price, the message is loud and clear "3G is an expensive option". This message bodes poorly for the embedded connectivity market. Why should a consumer electronics manufacturer add anything other than Wi-Fi for their portable devices?

If the electronics are expensive, then access is comparatively cheap with two monthly pre-paid plans being available: US$15 for 250MB and US$30 for unlimited. These prices compare to current AT&T contract pricing of US$40 for 200MB and US$60 for 5GB and those prices are for two year contracts. These prices say a lot about the relative negotiating positions of AT&T and Apple.

Apple didn't comment on how these prepaid plans will be purchased; our suspicion is that they will bought via the iTunes store and not directly from AT&T. Apple also didn't comment on who would deal with service issues such as lack or poor coverage; our assumption is that there will be limited support from Apple. We suspect that AT&T will become just another vendor in Apple store.

...or profiting from the Hardware?

Our overall conclusion is Apple is simply executing the same ecosystem strategy as ever: derive profit from the devices and accessories; and drive the price of content and access as cheap as possible. AT&T has been reduced to a simple pipe provider and there is nothing wrong with that as long as they can make a reasonable margin. The nightmare scenario for AT&T is lots of people watching YouTube, or higher definition, videos whilst out of the home. Unless, of course there is some twist in the AT&T and Apple agreement that limits exposure on the unlimited plan.

The MiFi Option?

A potential alternative to the Apple embedded 3G route is using a MiFi hotspot devices with these now being available for free on contract data plans from several operators including AT&T nemesis Verizon Wireless in the USA. Even with a contract, MiFi pricing has rapidly come down to US$150.

A MiFi device acts as a router using the cellular network as backhaul and allows multiple end-user devices to use this backhaul by setting up a local Wi-Fi network. Of course, the advantage of a MiFi hotspot is that they can be used for the full array of Apple products (iPod Touch, iPad and MacBook) simultaneously. Dedicated 3G dongles, of course, will not work because of the lack of a USB port on the iPad. 

Re-inventing the Netbook?

Jobs in his presentation dismissed netbooks as cheaper laptops which do nothing better. This is a little harsh but not far from the truth. Yes, netbooks are underpowered compared to laptops, but they are more portable and are powerful enough to do simple tasks.

jobs%20ipad%20feb%202010.png

This is where we believe the iPad excels - it appears to make the simple tasks easier. The hardware and the connectivity may be nothing earth-shattering, but the User Interface and the bundled applications appear beautiful. There obviously has been a huge investment by Apple in software, something that the netbook manufacturers currently do not excel in.

While the iPad appears to have been designed primarily as a reading device, it does include a full size virtual keyboard with option of keyboard accessory for people who want to write longer content. For those familiar with the iPhone user- interface, this will represent a great improvement, but whether it will or is intended to convert the entire netbook market is another matter.

Of note, Apple has reworked its office productivity suite, iWork, for the iPad. Furthermore, the demo highlighted how having a larger touch-screen interface can create all sort of innovations to make using these core applications easier to use. In contrast the netbook manufacturers typically bundle in a copy of the open-source OpenOffice to keep the unit prices down. Apple has fine tuned the applications to improve the user experience on the device, whereas the netbook manufacturers typically take the cheapest route. Apple has therefore not set out to compete at the bottom end of this market, and whether iWork will challenge Microsoft Office as an enterprise offering remains to be seen. So the device and software appear to be positioned against the upper-mid range of the netbook market.

As well as disrupting a niche of the netbook market, we believe that the iPad will also impact some of the new emerging devices that are arriving in the home. Devices such as the O2 Joggler and Orange Tabbee were designed to be simple family organizers with connectivity to the internet, but now appear extremely limited when compared to the iPad. There is definitely a space for the iPad to be everyone's friend around the home - looking up something whilst watching the TV, organizing family life in the kitchen, casual reading of books and magazines or listening to music in bed before sleep.

To read the full article, covering...
  • Some interesting Technology choices
  • A Kindle Killer?
  • A big deal for digital publishers
  • How big will demand be?
  • Conclusion

...Members of the Telco 2.0TM Executive Briefing Subscription Service can access the full item here. Non-Members, please see here for how to subscribe, or email contact@telco2.net or call +44 (0) 207 247 5003.