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.

Clearwire/Sprint Followup

I came across an article today about Sprint offering a 3G/4G USB Modem for $149 with a $79.99 per month contract. This USB modem will automatically switch between Sprint's 3G network and Clearwire's 4G WiMax network when it is available (which is currently only in parts of Baltimore).

It is a great step forward for Sprint/Clearwire that will make the service more attractive, but will people really pay an extra $20 a month for such a big external device?

If they really want Clearwire to be a runaway success, they need to find a way to embed this kind of technology into the phone and allow tethering of the phone to any computer (especially laptops). If they did that and threw in 1000 minutes and unlimited texts and unlimited data for $60 per month. I'm in.

What do you think?

@innovate

Will Clearwire survive until its market appears?

Clearwire recently completed the acquisition of Sprint's WiMax assets. Sprint's assets merge together with Clearwire's original WiMax assets to create the nation's largest WiMax operator.

I hate to beat up a local business, but Clearwire/Sprint represents a perfect case study of the perils of:

1) Letting ego drive strategy instead of market fundamentals
2) Launching into the marketplace too soon

Clearwire originally launched in smaller American cities where fixed-line consumer broadband was not widely available (making wireless broadband an attractive option). But, not content to fully exploit this niche, Clearwire instead began building out and promoting wireless broadband networks in first-tier cities like Seattle with a product that provided inferior speeds, service, and value. Instead of maximizing their niche strategy and waiting for technology and execution that provided a compelling value proposition for first-tier markets, they chose to launch with a sub-optimal offering and significantly increase their cash burn. I would argue that Clearwire made a mistake going after tier one cities when they did (destroying valuable brand equity they'll need later).

Meanwhile, Sprint was facing its own challenges in the wireless market (where they were now #3) and hoped WiMax would somehow propel them back into the top spot. Millions of dollars later Sprint decided the WiMax effort was a distraction and a money pit and agreed to merge their newly created Xohm unit into Clearwire in order to shore up their balance sheet and restore focus to their core business.

Collectively, Clearwire and Xohm have burned through a ton of cash and expect to lose an ever increasing amount now that they are starting to build out their network. A network they are starting to build out 1-2 years too soon. Why do I think that?

First, WiMax-capable mobile phones are a rarity and it will be another year before smart phones really start exploding in the United States. Plus, there are only a few laptops currently that come with WiFi/WiMax chips built-in. Given current economic conditions, in one to two years a huge majority (probably 70-80%) of people will still have laptops, desktops, and mobile devices without the capability of connecting to Clearwire's network. That means very few urbanites are going to subscribe to the network they are building.

So what should they do?

Delay building the network. Delay the start by 1-2 years. Lobby Congress to help make it an infrastructure project (Why not? - everyone else has their hand out). Roll out the network in line with technology adoption, not in advance of it.

Begin building the network when combination WiFi/WiMax capabilities begin to be built into the cheapest laptops, desktops and smart phones. If Clearwire starts building the network in network in 1-2 years instead of now, they'll be able to install faster or longer range hardware (probably for less), and there will be exponentially more people who will see the value of switching and potentially ditching both their fixed broadband and mobile carriers.

Personally I would love nothing better than to pay $40-60 a month and get both mobile phone service and broadband (for home and to go). If Clearwire can deliver that, I'll be first in line.