Will Apple Introduce the Innovation Expected from Google?
by Braden Kelley
Some great conversations have sprung up around my previous articles on the rumored Apple Tablet (iSlate). In the past I focused on what innovation Apple's potential tablet device might offer and whether or not Apple is likely to make the rumored first year sales projection of 10 million units.
A recent comment from "Marketing Department" brought up the topic of subsidies and whether or not Apple might be on the verge of introducing another business model innovation. So, in this article we'll dig a little deeper into that possibility.
When Apple launched the iPod, they introduced the iTunes business model innovation which turned the music industry on ear, quickly followed by the television and movie industries. Then Apple launched the iPhone and introduced the App Store business model innovation and introduced a new way for people to purchase software that the competition quickly rushed to copy. Now, what could Apple create with a Tablet device?
Well, obviously the App Store and iTunes will be present on this new device, and the iTunes Store will likely be extended to cover books, newspapers, and magazines. An extension of the iTunes Store is more of an incremental innovation. So what disruptive business model innovation could Apple do that would catch the competition off-balance?
Well, in my mind, Apple could very well launch the business model innovation that I expected to come with Google's Nexus One smartphone (but didn't) - shifting the subsidy model.
Currently, when a customer buys the Google Nexus One or the Apple iPhone, the mobile service provider subsidizes the cost of the device by about $325 in exchange for a 2-year contract from the customer. This ties the customer to the carrier for two years (and usually longer). I was expecting the Nexus One launch to include an unlocked phone that Google themselves subsidized in one way or another. One way could have been to pay the customer to use the phone on whatever carrier they wished by depositing money every month in a Google Checkout account based on ad views. This did not happen.
But Apple could take this idea one step further. Not only are they moving into the advertising game with some of their recent acquisitions, but they already have the incredible reach and product offerings provided by the iTunes Store and the App Store. While several people expect any Apple Tablet (iSlate) to have a retail price of $800-$1,000, a mobile carrier subsidy might bring it down into the $500-700 range. Might not Apple then be willing to subsidize it even further based on expected future media and content sales to push the price down into the $300-500 range and make it cost competitive with netbooks and the Amazon Kindle?
After all, Apple makes money (or could make money) in a number of different ways after the device purchase:
1. Applications (Downloads, In-App Advertising, In-App Purchases)
2. Media (Music, Movies, Television)
3. Books and Textbooks
4. Subscriptions (Music Streaming, Movie Downloads, Newspapers, Magazines, TV)
5. Advertising (TBD)
6. MobileMe
You could look at this very much like HP and their ink cartridge business. But how much of a subsidy could Apple offer?
Well, some limited data I found indicates that from this particular data set that the average iTunes transaction is $7 and an average of three transactions per month are made. That would equate to about $21 per month or $250 per year. So, what if you add in games, applications, and other content?
To keep the calculations easy let's say that the $250 becomes $500 when other kinds of content are added in, and using Apple's 30% revenue share, that would give an estimate of $150 per year per user. Yes, I know this is highly simplified, and from a small dataset, but we're just imagining possibilities not doing financial forecasts.
From this point, you could go two ways, look at this as a customer lock-in possibility for Apple and a potential perpetuity, or look at a fixed device life. Again, because this is only illustrative let's simplify and say that over four years Apple might expect (using this data) to earn $600 in revenue per device (excluding advertising revenue) and if Apple decided to dedicate 25% of this revenue to a subsidy, they could allocate $150 to bring down the cost of the device and the rest to go towards costs and profits. Throw in some advertising revenue for good measure, and maybe it makes sense for Apple to subsidize this new device by the $200 that might be necessary to bring the price to customer down into the $300-$500 sweet spot.
But how much of this revenue is incremental revenue? Will the device be an incremental purchase (an additional device people buy), or will it replace a Macbook, iMac, iPhone, or iPod purchase? Would it really make sense to do this?
Hopefully these quick and crude calculations have helped you to see why Apple might consider launching their own subsidy with their rumored tablet device (iSlate, iPad, iCanvas, iTablet, Macbook Slate, etc.) and why they might not. It will be rather interesting to see what they do...
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Braden Kelley is the editor of Blogging Innovation and founder of Business Strategy Innovation, a consultancy focusing on innovation and marketing strategy. Braden is also @innovate on Twitter.
Some great conversations have sprung up around my previous articles on the rumored Apple Tablet (iSlate). In the past I focused on what innovation Apple's potential tablet device might offer and whether or not Apple is likely to make the rumored first year sales projection of 10 million units.A recent comment from "Marketing Department" brought up the topic of subsidies and whether or not Apple might be on the verge of introducing another business model innovation. So, in this article we'll dig a little deeper into that possibility.
When Apple launched the iPod, they introduced the iTunes business model innovation which turned the music industry on ear, quickly followed by the television and movie industries. Then Apple launched the iPhone and introduced the App Store business model innovation and introduced a new way for people to purchase software that the competition quickly rushed to copy. Now, what could Apple create with a Tablet device?
Well, obviously the App Store and iTunes will be present on this new device, and the iTunes Store will likely be extended to cover books, newspapers, and magazines. An extension of the iTunes Store is more of an incremental innovation. So what disruptive business model innovation could Apple do that would catch the competition off-balance?
Well, in my mind, Apple could very well launch the business model innovation that I expected to come with Google's Nexus One smartphone (but didn't) - shifting the subsidy model.
Currently, when a customer buys the Google Nexus One or the Apple iPhone, the mobile service provider subsidizes the cost of the device by about $325 in exchange for a 2-year contract from the customer. This ties the customer to the carrier for two years (and usually longer). I was expecting the Nexus One launch to include an unlocked phone that Google themselves subsidized in one way or another. One way could have been to pay the customer to use the phone on whatever carrier they wished by depositing money every month in a Google Checkout account based on ad views. This did not happen.
But Apple could take this idea one step further. Not only are they moving into the advertising game with some of their recent acquisitions, but they already have the incredible reach and product offerings provided by the iTunes Store and the App Store. While several people expect any Apple Tablet (iSlate) to have a retail price of $800-$1,000, a mobile carrier subsidy might bring it down into the $500-700 range. Might not Apple then be willing to subsidize it even further based on expected future media and content sales to push the price down into the $300-500 range and make it cost competitive with netbooks and the Amazon Kindle?
After all, Apple makes money (or could make money) in a number of different ways after the device purchase:
1. Applications (Downloads, In-App Advertising, In-App Purchases)
2. Media (Music, Movies, Television)
3. Books and Textbooks
4. Subscriptions (Music Streaming, Movie Downloads, Newspapers, Magazines, TV)
5. Advertising (TBD)
6. MobileMe
You could look at this very much like HP and their ink cartridge business. But how much of a subsidy could Apple offer?
Well, some limited data I found indicates that from this particular data set that the average iTunes transaction is $7 and an average of three transactions per month are made. That would equate to about $21 per month or $250 per year. So, what if you add in games, applications, and other content?
To keep the calculations easy let's say that the $250 becomes $500 when other kinds of content are added in, and using Apple's 30% revenue share, that would give an estimate of $150 per year per user. Yes, I know this is highly simplified, and from a small dataset, but we're just imagining possibilities not doing financial forecasts.
From this point, you could go two ways, look at this as a customer lock-in possibility for Apple and a potential perpetuity, or look at a fixed device life. Again, because this is only illustrative let's simplify and say that over four years Apple might expect (using this data) to earn $600 in revenue per device (excluding advertising revenue) and if Apple decided to dedicate 25% of this revenue to a subsidy, they could allocate $150 to bring down the cost of the device and the rest to go towards costs and profits. Throw in some advertising revenue for good measure, and maybe it makes sense for Apple to subsidize this new device by the $200 that might be necessary to bring the price to customer down into the $300-$500 sweet spot.
But how much of this revenue is incremental revenue? Will the device be an incremental purchase (an additional device people buy), or will it replace a Macbook, iMac, iPhone, or iPod purchase? Would it really make sense to do this?
Hopefully these quick and crude calculations have helped you to see why Apple might consider launching their own subsidy with their rumored tablet device (iSlate, iPad, iCanvas, iTablet, Macbook Slate, etc.) and why they might not. It will be rather interesting to see what they do...
Enjoy this post? Subscribe to our RSS feed and join our Continuous Innovation group!
Braden Kelley is the editor of Blogging Innovation and founder of Business Strategy Innovation, a consultancy focusing on innovation and marketing strategy. Braden is also @innovate on Twitter.Labels: Apple, Braden Kelley, Innovation, Strategy
posted by Blogging Innovation at 1:02 AM
3 Comments:
Braden, interesting reflections. However, I'm not sure this is in Apple's interest. Most hardware manufacturers are obliged to subsidize their products because they compete in red oceans of similar products. As a consequence they have to try to make up on revenues with services.
Apple is on the other end of the spectrum with its products: High-end differentiated devices that evoke emotions. That allows Apple to command amazing margins - they earn golden revenues on hardware because they are game-changers. At least in at the beginning of the product life-cycle Apple fans are willing to pay almost any price. Why should they undermine that model?
A quick look at how the Nintendo Wii is changing the console industry can also give insights. Before the Wii hardware manufacturers had to subsidize their devices to make them accessible. Through an emotional, game-changing product Nintendo was able to drop those subsidies and earn a fortune on game sales royalties AND hardware sales.
Just some thoughts from Switzerland, Alex
Hello Alex,
Thank you for your comment Alex.
I'm with you, I would agree that while Apple could subsidize their rumored tablet, I don't think they will. If you look at the stats from Apple's Q4 2009 earnings reported yesterday (below), the figure that jumps out is the whopping 40.9% gross margin. As a comparison, HP's Total Gross Margin for the 3 months ended Jul. 31, 2008 was 24.2%.
Subsidizing their tablet would be inconsistent with their premium positioning. Apple is addicted to high gross margins, and for that reason alone I can't see Apple doing anything to jeopardize their margins and their stratospheric stock price.
It is also in Apple's best interests for the first generation of any tablet device to not sell in high volumes as it will likely have significant flaws (much like the iPod and iPhone did when they first launched) that will show themselves when the device is out in the wild and because of Apple's need for secrecy, for all intensive purposes Apple's first generation products are beta products that they get people to pay a high price for.
When it comes to Apple and the business model of paying people to use the device (based on ad views), at this point in time Google is much better equipped and ready to do this than Apple. Google hasn't done it yet, but it doesn't mean they won't offer this as an option in the next 12 months (especially given the tepid response to the Nexus One so far).
The iPhone is the Kleenex of the smartphone market, so Google needs to approach the market in a new way if they want to be successful.
Another interesting fact is that Apple sold almost three times as many iPhones as Macs. Despite that, Nokia sold twice as many smartphones as Apple in Q3 and RIM still outsold Apple as well.
Q4 2009 Key stats:
GAAP Revenue: $15.7 billion
GAAP EPS: $3.67
Macs: 3.4 million vs. 3.0 million consensus
iPhones: 8.7 million vs. 9.1 million consensus
iPod: 21 million vs. 21.0 million consensus
Gross margin: 40.9%
Guidance (Rev.): $11.0 billion to $11.4 billion
Guidance (EPS): $2.06 to $2.18
Braden
@innovate
Braden, great that you followed up with the numbers. Apple is a somewhat unconventional beast and often acts in a "contrarian" manner. That's what makes them so amazing.
You point out an interesting issue: how the Apple vs. Google battle will look like. Both have some interesting assets to bring to the table. It will be fun to follow how this unfolds!
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