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The billion dollar Smart Cover

I was only half-joking when, on first sight, I tweeted that I will buy a new iPad 2 to go with my new Smart Cover. The new iPad cover is enchanting.

It also seems to be enchanting to many.

I’m estimating that at least 60% of iPad buyers will get one. Based on an estimate of 36 million iPads sold in 2011 and an average price of $48 (70% polyurethane and 30% leather mix), the total revenue for Smart Covers will top $1 billion this year.

I further estimate that with a very modest gross margin of 75% (average cost to produce of $12), the Smart Cover could contribute $777 million to Apple’s gross margins.

The iPad by itself should generate $23 billion in revenue and a contribution of $7.7 billion. That means that the Smart Cover will add 4% to sales and 9% to gross profits. If taken as a bundle, the iPad+SC will increase gross margin over the iPad alone by nearly 200 basis points (taking it from 33% to 35%).

It will be interesting to compare the Smart Cover business with competitor tablet businesses.

  • http://twitter.com/JanCifra @JanCifra

    Apple has a long history in making interesting and expensive accessories for its product range. One comparable to the SmartCovers is the Bumper case for iPhone 4. We know Apple incurred a $100 mil expense for the free bumper program to compensate for the antennagate issue but I wonder how many people bought one and what the margin could be on it.

    The SmartCovers are a good business and while I agree – the iPad 2 is yet to meet a real challenger – I would not underestimate third-party case/cover manufacturers and the estimation of 36 million iPads sold is maybe a bit optimistic. Can they even manufacture that many?

    Btw I am buying 2 next week.

    • asymco

      3 million iPads/month seems sustainable. It's not much higher than the rate for late last year.

      The charge for the bumper also included shipping costs which were considerable since each was sent individually but that's an interesting comparison.

  • Nalini Kumar Muppala

    Given your projections, the smart cover could by far be the most profitable accessory. 3rd party accessory vendors would be the biggest losers and would be enraged for Apple taking away this market.

    This bolsters your argument that "product" is consummate at Apple, and nothing is spared — not even relations with accessory ecosystem partners.

    • Hamranhansenhansen

      3rd party case manufacturers will not be enraged, they will be delighted with Apple for 1) a new form factor, requiring all-new case purchases, 2) putting in magnetic case attachments and sensors they can use with their own cases, 3) making it easy for users to have a collection of many cases for every mood because they snap on and off so easily, and 4) selling tons of iPads, a product and product segment that did not even exist a year ago.

      • The Cappy

        Point #2 is the main point. Anyone can make use of these magnets.

        Although they have 1st mover advantage… but since the case makers have been so bad at keeping secrets, they kind of made that bed themselves.

      • Nalini Kumar Muppala

        Bad choice of words. I was thinking that it would be hard for 3rd party vendors to beat the smart cover. It looks like a perfect design.

        As Apple says, it makes a few apps to show what can be done. So it is with the smart cover. It is a design that shows how good a case can be. 3rd party vendors have to make a much better design to have any chance for a buyer to choose their product over SC.

      • nik

        Apple's relationship with the 3rd party accessory makers has always been a bit shaky – Apple despises many of them for making sub-par products – ugly, unnecessary (iPhone screen protectors – soft plastic protecting the ultra-hard gorilla glass from scratches?!), etc.

        Apple very often provides a reference design for what they think an accessory should be like. The original iPad cover is a good example. The Apple HiFi another.

        Apple sells theirs at a pretty high price. You could say that's because they're greedy – or you could say that's because they are perfectly happy with 3rd party manufacturers being able to undercut them on price.

      • Jons

        3rd party vendors wil add new designs for different needs and tastes. My first thought was a case that protects the ipad all around, including the back and especially the corners that the ipad is likely to fall on, while using the magnets for quick and easy snap-on and off.

        I have to admit the smartcover made my pupils dilate.

    • James Katt

      3rd party case manufacturers should also be very happy.

      Apple DID NOT MAKE A CASE for the iPad 2. They made a COVER. This is completely different a situation than with the iPad 1, where Apple truly made a case for it – which hindered the purchase of 3rd party cases.

      Since the cover is not a case, customers will realize that they still need a case for the iPad 2 to protect it from all angles. The iPad case only protects the front glass. It doesn't protect the corners, the back, the sides, etc. of the iPad 2. Thus, the iPad 2 will be a BOON to 3rd party cases.

    • Synth

      I would guess that similar 3rd party smart covers will be on the market within weeks, if not days. Nothing should prevent them from taking advantage of the magnetic latches. And in 2011, the peripheral makers will have a target market of 40 million users, compared to "only" 15 million. So I think they'll be fine

    • chano

      Enraged at the hand that feeds them?
      Really?
      They are only aftermarketeers.
      Does the tail wag the dog?

      Chandra C

    • KenC

      "enraged"?!? Hardly. Apple has always left lots of money on the table for accessory makers, whether they are apps or covers.

      It's clear that the Smart Cover was made as a way for Apple to recoup some of the margin that they gave away by pricing the iPad at $499 and up. And, as noted above, it's the same with the bumpers for the iPhone4. Apple doesn't make many accessories, but they try to make one, special enough, that lots of people buy it, to increase overall margins.

      If Apple had released an iPad without a cover, people would complain that Apple was irresponsible for selling a large glass device subject to breakage without protection until 3rd-party mfrs had tooled something up. Damned if you do, damned if you don't.

  • iBob

    No external vendor could have supplied the Smart Cover since it required the built-in magnets.

    • d10

      Nope, magnets are inside iPad (you can see that on some teardown sites).

      • iBob

        Correct. The Smart Cover required that magnets be built inside the iPad for this concept to work. If Apple had not developed this scheme then there would have been no possibility for any other cover vendor to use a magnet concept.

      • ClassicUser

        Yes, and there are also magnets within the Smart Cover (to keep it closed when rolled into the pyramid support, for example). The combination is what makes it so flexible – and what I'm sure 3rd party manufacturers will be able to emulate for their own products.

    • Frank

      No one could have supplied it prior to Apple creating the iPad 2 with the built-in magnets but nothing is stopping anyone from utilizing those same magnets in their case design now. That's like saying that no vendor could have supplied [insert name of iOS 30-pin accessory here] because it required the 30-pin dock connector. We know how many of those accessories exist.

      So, you could say that no one could have come up with this idea prior to the iPad 2 being announced but I'm sure we'll see plenty of cases taking advantage of this now in order to fill the gaps left by the Smart Cover.

  • George Bailey

    I think 36 million is *low*. In my circle of friends I've always been "the guy to ask" about computers. Many of my friends are not tech-savvy. For some of them, a successful Copy and Paste is a big accomplishment. And yet they all want to know about the new ipad. They knew about the release date. And this is not in the US. In fact it won't make it here for a couple of months at least.

    It really feels like we are at the beginning of a complete overhaul of personal computing. It's like the switch from cassettes to CDs. *Everybody* will be getting one.

    • Hamranhansenhansen

      I agree. Last year's estimates were 3-5 million, and it was 20 million. This year's estimates are 30-40 million and I think they are low also.

      There is talk of selling iPads at Bed, Bath, and Beyond, and it could work. This is a much broader product than PC's or even mobiles. People teach themselves how to use it in a very short amount of time. And there are companies who will buy 10,000 iPads at a time this year because it has been shown to increase productivity and has almost no setup or training costs.

      Last year, a lot of people learned what an iPad is. The original iPad was sort of a beta test and demonstration. This year everyone knows what it is and everybody seems to want one.

      • GeorgeS

        "I agree. Last year's estimates were 3-5 million, and it was 20 million. This year's estimates are 30-40 million and I think they are low also."

        Not quite. In 2010, Apple sold 14.8 million iPads–3.3 millon in the July quarter, 4.2 million in the September quarter, and 7.3 million in the holiday quarter.

        "And there are companies who will buy 10,000 iPads at a time this year because it has been shown to increase productivity and has almost no setup or training costs."

        Such as? Many companies are allowing employees to use their own iPads, but are not buying them. I've read of a few (including some hospitals) that have bough 1,000, but 10,000?

      • DaveMTL

        Yes, apparently so. The person I got this from could not say which companies or how much but stated they were in the "truck loads". I would be really interested to know how they were deployed.

      • Kizedek

        There are also lots of promotional offers to cosider too. Here in the Netherlands, were enticed by one health care provider (we were going to make a switch anyway) because around Christmas they offered an iPad for signing up with them.

        We weren't due to get it until April, so I was really anxious to learn if they would supply us an iPad 2 or just get us the cheaper iPad 1 (we already have one iPad 1 among the five of us in our family, so it gets constant use).

        Happily, we just received an email saying we get a choice. So we are stoked, even if it means waiting until June before we get our iPad 2. This offer alone, in one country, may amount to a few thousand iPads. It's not unusual to see such offers. Would I have taken a Xoom offer? I would have avoided that company like the plague ;). (of course, I know it is the consumer group contracted with gaining new subscribers that is making the offer — but that just goes to show that Apple's 30% for subscriptions is not unreasonable)

    • iBob

      Recently I read on a Taiwan site of a components manufacturer expecting to deliver 48 million parts this year. Sorry I've misplaced the link.

    • poke

      I've heard similar things. I read all the reports coming in on the lines for the iPad 2 launch and the one thing I kept seeing over and over again is that the lines were composed of people from all walks of life and included families, children, etc. I really do think this is the next generation of computing, that it will displace the current generation quickly (over the next 5 years), that this displacement will be more total than anyone thinks (I question whether laptops will still persist even as "trucks" in 5 years) and that the new generation will sell to a far larger audience.

      The only question in my mind is how quickly it happens. At some point it's going to explode, it may be this year or next, but the first 24 hours of demand for the iPad 2 is certainly compelling. I think a major factor is iOS 5. What it will bring, when it will be available for the iPad, and whether iPad availability will again trail the iPhone. If iOS 5 clears away the remaining barriers to the iPad being used as a comprehensive laptop replacement then I think this could be the year for really explosive growth. (It will also indicate Apple's priorities.)

    • Frank

      I agree with your assessment but I think especially on this site, which is known for placing a high importance on facts, we should keep the numbers correct. Apple sold 15 million last year.

  • http://www.igoe-ip.com Patrick

    I had run an estimate a few days ago and came up with ~$500M for the Smart Covers. We mostly differ in the Cover adoption %. I expect closer to 30% overall Smart Cover purchases, rather than your 60% for a few reasons. 1) Many people will want both sides protected and opt for a third-party case. 2) Much cheaper knock-offs of the Smart Cover will probably arrive within 60 days and negatively impact the adoption of Apple's own covers after that point. 3) Many people will skip a case altogether so as not to disturb the inherent appeal of the device design.

    Anecdotally, when I waited in line near Philadelphia Friday, I did not see a lot of action near the Smart Cover rack once I made it into the store.

    Either way, this will be a remarkable addition to earnings from an accessory.

    • george

      My experience Friday at Best Buy in LA was just the opposite. Covers sold out as soon as the y were offered.

    • DaveMTL

      By using a invisishield type solution one can protect the back from scratches and use the Apple smart cover for the front. This does not protect from drops but allows protection while adding little mass or thickness.

    • nik

      I've never seen a naked iPad in the wild, except for my own. People LOVE, love, love cases.

  • http://twitter.com/JanCifra @JanCifra

    I agree with the point made by Patrick in regards to the adoption rate. I also believe a strong factor will be consumers wanting to protect the back of the device. Now until we have some real numbers it is difficult to say. Some people I have spoken who had the opportunity to play with the iPad 2 and the SmartCovers say that you won't believe how useful they are until you try them. I really wonder whether 3rd party accessorie makers will be able to make use of the magnets.

  • Rob Scott

    Based on my footwaer experience the marginn on the PU covers is probably 90% and +/-60% for the leather ones. I think a 60% adpotion rate is more than doable given that most wil buy more than one color.
    I think you can add garage band as one of the must have for the new iPad.

    Apples focus on product enables them to rake in massive profits!

    • Hamranhansenhansen

      GarageBand also runs on the original iPad. It is terrific software. There were already multi trackers and sequencers, but nothing quite as complete or approachable. They really nailed the perfect newbie/expert mix, where it is fun and easy and productive for newbies, yet for experts it is a great sketchpad. The GarageBand documents can even be opened in Logic Pro. The touch sensitive instruments are fantastic, what a great use of the accelerometer. It's worth buying an iPad for.

    • Bertil H

      Well, I believe it may be the other way too, the outstanding GarageBand will sell a lot of iPads…

  • dms

    People who want to protect the back can easily do so with protective film. Given how popular the original iPad cover was, despite being a crap product, I expect the Smart cover to be all the rage. I've never seen so much media coverage for a iProduct cover. Absurd actually.

    • James Katt

      The iPad 2 Smart Cover is NOT a crap product. It is a smart product. It is innovative. It is very innovative. It acts also as a stand for the iPad 2. It comes in colors so that the Apple customer can individualize their iPad 2. For customers that want minimal protection for their iPad 2, it is PERFECT.

      These are reasons why there is so much media coverage over the smart cover.

      The media these days wants eyeballs since this is what makes them money on ads. They will only show news which get eyeballs. If it won't get eyeballs, they won't cover it. Thus the extensive media coverage of the iPad 2 Smart Cover illustrates how the media expects coverage of this item to get them a large number of eyeballs. It isn't absurd when coverage of it makes them more money.

      • KenC

        He meant, the original cover for the first iPad.

  • Xavier Itzmann

    Our old iPad never had a cover of any type, just like our iPhones do not either.

    The new one will be getting a smart one.

    • WaltFrench

      I just showed the vid of the smart cover to a friend who's visiting, who had said she had no reason to want an iPad. Afterwards, “OK. I succumb.”

      I wouldn't be surprised to see the average numbers of covers exceed 1 per iPad. Accessorizing demands variety.

      • Neil Anderson

        Pink!

  • ldb

    (It's the Gelaskin that allegedly ships Monday, the ipad is here on my desk… :)

  • DaveMTL

    Third party vendors must be salivating over this machine and the potential for these magnets. I suspect we will shortly see entirely new uses for the magnets.

    • eyez00

      It's a new (sub)ecosystem ready to be born.

      3rd Parties are going to think of things to do with these magnetics & anchors that will amaze & enchant us (consumers) in 2011 & will become standard & everyday (for ALL iPadesque tablets) by 2012.

  • nkgmd

    I'll bet more than a small percentage of ipad 2 buyers will by an assortment of covers, or at least one leather, one polyurethane. It's hard to pick a best color out of these choices.

  • g3user1usa48

    The iHaters say that only Apple can take $4 worth of materials and sell it for $40 and they're pissed at the fact that Apple is cheating consumers to that degree. Some Android fanboi said he can build a Smart Cover made from shirt cardboard, duct tape and Elmer's glue for pennies.

    • Michael

      Says a lot about why he uses Android!

    • Pieter

      Funny (or sad…) is the fact that those people always complain about the markup on Apple products, but strangely think that their objects of adoration are sold at cost of parts… Suuure.

      (Also funny is that that guy is obviously not smart enough to build some 'shirt cardboard, duct tape and Elmer's glue' Smart Covers for the iPad and milk all those gullible Apple Fanbois…)

  • http://twitter.com/BrianSHall @BrianSHall

    Love this:
    "It will be interesting to compare the Smart Cover business with competitor tablet businesses."

    A couple days ago on my site I said iPad 2 will sell more its opening weekend than Xoom sells all year. And unlike some, I am not expecting more than about 40 million iPads to sell this year. Right now, Apple has more than a year lead.

  • timnash

    Another sizable market is 'corporate smart covers' both as gifts and to customize corporate iPads. Look for Apple to offer these in time for the Christmas market.

    • Guest

      Do we suppose Apple has a patent on the smart cover?

  • Gary Watson

    Today my Smart Cover saved my new iPad2 when the TSA goon dropped it from 4 feet down to the tile floor. There was a sickening SMACK sound but zero visible damage. Landed screen first, flat. I think your money estimate is low as lots of people will be like me and buy several different covers. Friggin awesome product. Twitter: GaryMWatson

    • Abhi Beckert

      I've dropped my iPhone's and iPad's from those heights many many times.

      The 3GS was a little damaged, but my iPhone 4 and iPad have so far survived my fumbling without a mark.

  • http://twitter.com/NotMyBro @NotMyBro

    I've tried several times yesterday and today to find an iPad 2 (any model) in NYC and failed miserably. They're all out… not a single iPad2 anywhere.

    Interestingly, I found very few covers too! Only some leather ones are left (since they're more expensive).

    Everything else is sold out.

  • http://twitter.com/dusser @dusser

    Accessories are generally gold mines with huge gross margin.

  • KenC

    I think HD means, conservative, in that the GM may be higher. He surely knows the GMs of various product lines.

    While you may consider it a "luxury case", I think most people buying a $500+ device will consider the PU cover to be a bigger bang of magic for the bucks, and have to have it.

  • http://twitter.com/kawika @kawika

    On March 2, I wrote this quip https://twitter.com/#!/kawika/status/430248910621… about Apple's Smart Covers. Apparently, it was retweeted hundreds of times and made Twitter's home page as a top tweet. In response to some questions about it, I suggested Horace would be my first pick to track whether Smart Cover profits beat the industry's tablet profits.

    Horace, a lot of people out there — many, perhaps, with only a passing interest in technology — are paying attention to this metric it seems. If my prediction (or yours) comes true, can you imagine the fallout?

    The mere fact we might be able to equitably compare Apple's Smart Cover business to that of rivals' tablet businesses would be too juicy a talking point for the press, the pundits or the public to avoid. Humiliating.

    The tablet market potential seems too vast, and the ecosystem too interdependent, for Google, Microsoft, HP, RIM, and others to let this go on forever. I can't imagine they all want to be a rounding error in Apple's iPad financial spreadsheets. One or more of them will have to start thinking bigger, or making bolder bets, if they're going to compete by the holidays.

    Regardless, I'm looking forward to the fight — and to your coverage of the financial effects.

    • Childermass

      … "if they're going to compete by the holidays". Which year?

      I do not think Jobs was joking when he said the iPad was 10 years in the making. Chip design, battery life, screen sensitivity, UI, sensational bar raising Apps, the ecosystem, supply chain, price. All killer features. Copyists don't know what has happened. What do they copy? How do they make improvements? Some will inevitably convince themselves USB and Flash are key. Others will go for price. Some will think it is the size. They will all produce comedy imitations until one of them chooses to understand the core product ethic – consumer usability – and then they will have 10 years work ahead of them. Well, maybe 5 as it always that little bit easier following.

      So holidays 2016. I wonder what iPad 6 will be like?

      • Jaquin

        Considering that the iOS App store seems to have been a second thought by Apple management (remember they wanted web apps), the importance of the app ecosystem seems to be the most critical feature that a competitor needs to copy. Google has released the SDK, Amazon has plans to have a curated Android App store, presumably for both phones and tablets.
        The competitive environment is not lost to other tablet contenders, and the Netbook as a category may see some revival this year; dual core chips with GPU on board from AMD, for many people they will be a reasonable choice over an Ipad or a Macbook Air.
        Apple management showed themselves at the Ipad2 unveiling to be spoiling for a fight. I don't doubt their acumen, but can their competitors continue to be as feckless as they have been to this point?? I don't think so.

      • KenC

        Honestly, I think Apple management was just playing for time. They barely got the original iPhone and its iOS out the door. They also had a MacOS X Leopard that got delayed by the iOS development. After that, could they take a breath and finish the SDK work for apps.

        As for Amazon's plans, and AMD netbooks and whatnot, let's see what they actually roll out before dubbing their efforts better than "feckless" shall we? Why assume they'll get any better or smarter? That's like assuming Ballmer will see the error of his ways and turn Microsoft's mobile business around.

      • http://twitter.com/davidchu @davidchu

        How has iOS apps been an after thought for Apple? They spend huge amounts of resources running the store. $1 billion in last 3 years. Do you know why Google opted not to curate their store? Its not because they want to be open, it's because it's crazy expensive and man power hungry. Ask Amazon a year after their app store launches if it was worth it. Ask them how they like dealing with all the support calls and emails from apps crashing because a manufacture wrote a buggy driver.

        The problem for Apple's competitors is that their core competencies don't translate over to the mobile computing space. It's why apps crash much more often on Android and why Android can't hit the same battery performance specs. It's why a Xoom with a dual core chip clocked at 1000 ghz can't keep up with an A5 clocked at 900 ghz.

        The worst part for them is that Apple doesn't have one arm tied behind their back in the tablet space like they do in the smartphone race.

      • asymco

        The iOS App store may seem to have been a second thought but it's fairly easy to determine that it was the first thought. The App store had to happen once the SDK was released and the SDK was planned well in advance of the iPhone launch. In fact, the SDK was what Apple used to build the iPhone apps that shipped with the iPhone 1. The APIs were always there, just undocumented before SDK release.

    • asymco

      The iPad is looking more and more like the iPod every day. There still isn't a credible competitor for the iPod touch even though it's killing it in the market.

      • dms

        Yes, but the one key difference with the iPad is that it eats into the core business of many of the big boys, including Microsoft, HP, Dell, Acer, and Intel. So they have no choice but to mount a credible response. Otherwise, they're toast (in 5 years).

      • newtonrj

        Explain that to Microsoft Zune, Diamond Multimedia's Rio, Sony X-Series Walkman digital players, Creative Labs, or the recently released Android/Samsung Galaxy Player. All iPod slayers that got mimialized by the bohemoth iPod.

        The competitors moved on to a new business, fell back on old business models, or are on life support.

        The real question that few people articulate is what happened to the PDA? We were so focused on the iPod, that we forgot about a PDA until iPhone neatly integrated it with the music, apps and phone. -RJ

      • FalKirk

        "…the one key difference with the iPad is that it eats into the core business of many of the big boys, including Microsoft, HP, Dell, Acer, and Intel. So they have no choice but to mount a credible response. Otherwise, they're toast (in 5 years)."

        I understand your point and respect it insomuch as it means that the tablet wars are going to be a fight to the death whereas the MP3 wars were a mere sidelight for many of the companies involved. But I would also caution you not to believe that just because these companies are more desperate, that they will be any more successful. I would argue that all of the companies that participated in the MP3 wars were in BETTER position to provide a credible competitor to the iPod than they are able to provide a credible competitor to the iPad today. Apple has flanked them, and Apple is not virtual tiny start up it was in 2001. Apple is now the largest most nimble tech company on the planet. This might be a fight to the death for Microsoft, HP, Dell, Acer, and Intel but they up against the biggest, baddest junk yard dog in the world. Desperation alone is not going to be nearly enough to save them.

      • Childermass

        Yes. And funnily enough the complete lack of 'competition' doesn't seem to have mattered much. The notion that competition is 'good' for Apple, or that the netbook/notebook manufacturers MUST respond is flawed.

        Competition is the process by which quality and price find their happy norm, in theory. Many cereal manufacturers ensure we get the cereals we want at the prices we want, sort of. What happens when a product is produced that gets there first try? There is not much room for competition and, by the same token, not much need for it either. It seems the cry for 'competition' is simply a more sophisticated way of saying 'I want a USB port on it.'

        To say other manufacturers must respond is like demanding salamanders grow wings now the dragon has arrived. They are me-too suppliers and unless and until they choose to understand why the iPod and the iPad sell so well and actually do something about it then, yes, they are toast.

  • WaltFrench

    I can't imagine a circumstance in which the smart cover fails to beat the total of all competitive tablets' profitability.

    Regards fr'instance the nVIDIA Tegra2 chip in the Moto Xoom: nVIDIA claims a half billion dollars of development cost, probably on top of the costs of Tegra1. I don't know what platforms are going to adopt it, but at the rate that Moto is going, there won't be much in the way of volume discounts. Whereas iSupply estimated $10 for Apple's A4, we might guess $20 for the A5, but $50 for the Tegra2, at which Moto is at another $30 cost disadvantage.

    And Motorola has non-trivial development costs for the Xoom, too. Right now, it's the leading contender to the iPad2 and mostly for reasons of software incompatibility, the Playbook and Palm tablets look to struggle even worse. These high fixed costs are incredible hurdles to surmount, and that further compounds the dearth of 3rd-party apps.

    Even if nVIDIA can get $50/chip, it has to sell 100MM to break even. Meanwhile, TXN and others are also contending for the market into which tablet-class CPUs are sold; this looks downright ugly. While ARM can keep purring on the phone-class designs, an unprofitable dual-core market could hurt it, too.

    And not entirely, but as Horace jokes, not insignificantly, due to a scrap of plastic or leather with some magnets.

    [Edit: miswrote first sentence!]

    • dms

      Not sure if your math is correct but that $20 A4 in the iPad 2 blows away the Xoom's $50 Tegra2 in terms of graphics performance–3-4 times faster according to some benchmarks.

      This goes to how much further ahead Apple is ahead of their competitors in not only the product itself but also in manufacturing, procurement, and long-term planning.

    • OpenMind

      Smart cover does not have to beat all of so called "competitive" tablets. Just one of them, SAMSUNG, or MOT, is good enough. They are cheap copy-cat and wasting years of R&D in something useless. They should just die and go away.

    • CCBS

      I believe you need to do some fact check. Having been working in this industry, the cost of Tegra 2 is around $15 ~ $20 depending heavily on quantity. Motorola is definitely a key development to production partner and should pay no more than $15 per chip with preferential treatment. (early samples, shared development cost, guarantee supply, cycle and roadmap knowledge etc)

      ARM is making money selling both license and design. Apple is paying the initial architecture license and subsequence per-chip license to them. So, as long as the mobile tablet is using ARM based core, they will be fine and don't care whether it is Apple or nVIdia or Qualcomm.

      • Simon

        I agree I don't see why the A5 would be cheaper than the Tegra 2 seeing the die size of the A5 is more than twice that of Tegra 2.

  • http://stephenou.com Stephen Ou

    As many people said, Smart Cover's revenue will be more than any other tablet sales combined.

  • Random dude

    A related source of revenue for Apple that seems to be mostly ignored by analysts and investors is Apple's iOS apps: Pages, Keynote, Numbers, and now GarageBand and iMovie. GarageBand alone will be a must-have app for almost all iPad (1 and 2) owners IMO. I have been using it for a few days on my iPad 1 and it is awesome beyond words. Similarly the iWork apps regularly rank at the top of the app store sales charts and are the first apps many productivity-focused iPad owners buy. And note that while Apple makes only a 30% cut on third party apps, on their own apps they make 100%. Just like with the Smart Covers, I believe the revenue from this business quickly adds up to many hundreds of millions of dollars, and for 2011 possibly in the billions. This on a product with close to %100 gross margin…

  • kevin

    The Smart Cover shows that Apple knows the iPad (and the tablet product) is to be sold as a consumer electronics product and not a :techie" computer product, even though in almost all respects, it can be considered a personal computer. Jobs' post-PC comments and Apple dropping "Computer" from its name show this similar mindset. The iPad is to be sold like the iPod (1000 songs in your pocket).

    Do the other tablet makers really get this? Do they get why GHz and MB RAM is as scary as it is meaningful to the target audience? Moto asserts that the Xoom is better, but if it is, it is couched in the techie stuff like Flash and 4G and MegaPixel. The mainstream consumer just wants to know they can use the camera for Facetime and PhotoBooth, that it can view videos in YouTube and Facebook, and that this model is 2x faster.

    For iPod, iPhone, and now iPad, Apple is moving away from computer stores and expanding to consumer stores. I really wouldn't be surprised to someday soon see iPads sold in Bed, Bath & Beyond (as a commenter mentioned above) or high-end supermarkets/drug stores.

  • asymco

    Accessories margins are usually higher than 75%. I made a concession to the fact that there might be some materials costs that I'm not aware of (better hinges and the magnets themselves. ) I still think 75% is modest. By suggesting 50% margin on a $50 product you're suggesting $25 average cost of production. That is astronomical. Other comments indicate the cost of materials to be a tenth of that.

    With regard to how many will buy, I don't think it's seen as a luxury. I'm surprised by how many people get covers for their iPhones and an iPad needs a cover more than a phone does and this is *the* cover for the iPad. People choose covers not just to protect but to individualize the product. This cover comes in many colors.

    • http://twitter.com/peter_burke_ceo @peter_burke_ceo

      I don't see any accessory companies that go public. why? it seems to me a company with 75% gross margins would be in high demand by investors and would command huge multiples of earnings. where are the public accessory companies? Apple should spin off it's accessory business to shareholders. It should get a 30 multiple, which is double the current Apple p/e ratio. That would instantly add value. Given that it would, by your own estimates, be a multi-billion dollar business, with ~ 30%+ ebit margins, growing rapidly, it seems a great way to add value for apple shareholders. I doubt they are contemplating it. Why though?

      Three of you have stated that accessories are a 75% gm business. none of you have provided a verifiable source for that estimate. to be making such an audacious claim that these covers represent that much GM to apple, the burden of proof is on the analyst to support such a claim.

      • asymco

        Regarding citing the data, I worked in a company with an accessory business. I cannot cite non-public figures. You take your chances with my claims.

        Regarding margins, accessories are very lucrative but they are not a business that works all that well independent of the core. With accessories you often end up with overstock situations and are at the mercy of the underlying product cycles. If you are an independent supplier you have differentiation problems, distribution problems and get whip-sawed even worse by the product cycles. 90% gross margins does not guarantee high net profitability. In fact, you need that margin just to have a shot at breaking even. Apple's accessory business is much more stable since they have visibility into the cycle, have great brand value and no problem with distribution. (As an aside, Apple licenses the "made for ixxx" brand for what I believe is 10% off the top which makes the accessory business very big–you see the impact in the fact that iPod/iPhone and iPad are listed as product+accessories in the income statement–Apple accounts for the uplift by attaching it to the product).

        And with regards to gross margins equating investor value, software companies have 80% gross margins or higher. I won't get into the GMs for apparel companies. That does not make these automatically gold mines for investors.

      • Niilolainen

        Apple's product update cycle also a lot slower (annual) than Android competitors (a quarter or two)

      • http://twitter.com/davidchu @davidchu

        Their are lots of public accessories companies. They are called RadioShack, Best Buy, Bed Bath & Beyond, etc. Walk into any of these companies and they will spend 20% of their time selling you a product and 80% of their time selling you accessories (DVD, cables, covers, extended warranties).

      • http://twitter.com/peter_burke_ceo @peter_burke_ceo

        thank you. none of them have gm anywhere near 75%. they are low margin businesses.

      • asymco

        You seem to misunderstand gross margins. The accessories sold by the retailers above do have very high margins. The business are low margin but the products are very high margin.

      • kevin

        Though there are high margins on accessories, most of that margin is taken by retailers (Best Buy, Amazon, Walmart, PC Connection, etc). For the Smart Cover, Apple is the retailer (both physical and online Store), and gets to keep that money.

        It's really pretty much the same as clothing. It costs $5-10 to for materials, labor, and equipment to manufacture in volume, a dress that, with the right label, sells for $100+ at Macys (and $40-50 when discounted on clearance).. But very few people think that clothing production is a great business to be in.

  • Abhi Beckert

    Do you really think they're going to sell that many smart covers? I've never seen a single iPhone Bumper case, but nearly everyone I know has a third party case for their iPhone.

    This is a fashion accessory, people will want a cover that none of their friends have.

    I think once third party covers have the same magnets, apple's sales will drop significantly.

    • FalKirk

      Apple's covers have the advantage of being first mover to market, unique, Apple approved, Apple advertised, and displayed in Apple retail stores. Not only that, there have been actual reviews of the Apple Smart Cover written. When did you ever see that?

      Yeah, I think the Apple Smart Covers are going to do just fine.

  • WaltFrench

    An architect friend who's visiting had told us that she didn't particularly like reading on the iPhone but had no plans to get the iPad. After showing her the Cover video at Apple, her response was, “OK, I succumb.”

    I think many people, especially in design fields, will see the iPad as more magical due to the Cover. It certainly IS clever, and cute. I predict multiple covers per pad sold, as well as many more of the cover selling the tablet.

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  • Ed Tech

    What exposure does Apple have to the Japan national disaster? How much does Toshiba Flash RAM figure into Apple's products? Could the slowdown of Japanese semiconductor industry, or perhaps high precision tooling industry (for creating the manufacturing lines for unibody construction) significantly impact Apple's accelerating production schedules?

    • anon

      Flash RAM can easily be sourced elsewhere.
      Elpida, A5 supplier of package on package LPDDR, has had their Akita plant stop operations due to blackout. Can safely assume the wafers in process were ruined. Hiroshima plant is running perfectly fine.
      Don't know where the LPDDR is produced.
      Package on package is not new but still state of the art and your typical RAM maker like Micron can't make it so second sourcing won't be trivial.

      • CCBS

        Second sourcing the die from other manufacturer is not a difficult task. The key is the bond out orientation and the total die size needs to be comparable and compatible. The package redesign is probably a 6 weeks work to test chip production. So, if Elpida failed to supply enough chip, there is always Samsung to fill in the void while bringing Micron up.

    • ______

      Flash and RAM are two distinct components

  • Strait

    I have a smart cover my iPad and it's brilliant. I bought my iPad 2 at a Verizon store and I was able to test other tablets or are they. The iPad 2 to is superior in every way.

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  • O.C.

    For a device that needs a cover, they should give you one for free after you payed $500 +.
    But why hand them out for free, when there are plenty of shoppers buying one with a smile.

    Smart covers, for not so smart shoppers. Get them now at your local Apple store!!

    • newtonrj

      iFixit just published a teardown on the Smart Cover. http://www.ifixit.com/Teardown/iPad-2-Smart-Cover

      "There are a total of THIRTY ONE magnets within the iPad 2 and Smart Cover: 10 magnets in the iPad 2, and a whopping 21 magnets inside the Smart Cover. They're the reason why the cover works so well with the iPad 2."

      "It turns out that the cover doesn't work nearly as well once you take out the magnets, steel plate, and plastic structural supports."

      If anything can be gained from this IMHO, it is the attention-to-detail Apple spent to get the Smart Cover right. Just brilliant. -RJ

    • FalKirk

      "…they should give you one for free…"

      Entitled, are we?

      "Smart covers, for not so smart shoppers."

      Smart shoppers trade their money for things that they value more than their money. Stupid analysts are ones who don't know or understand this simple rule.

  • kizedek

    Devices with covers are called laptops (or netbooks, but who counts those?). There will soon be many choices of cover or case from accessory makers. Isn't Apple great for giving you the choice to buy one or not, and for keeping the price of the device as low as possible? And isn't Apple great for supporting a whole host of accessory makers in its valuable ecosystem? Apple is damned if they do, damned if they don't by the likes of you, aren't they?

  • George Bailey

    Sorry, wrong link (or at least, not the most direct link.) Here it is:
    http://www.ifixit.com/Teardown/iPad-2-Smart-Cover

  • http://notesark.com iphoned

    The leather version is more expensive than a Roku box and almost as much as AppleTV.

  • http://twitter.com/davidchu @davidchu

    An important trait to any disruptive tech is that it requires less support and maintenance. This allows the companies that jump on disruptive technology to operate at lower margins. Not exactly Microsoft's core competence.

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  • gerwitz

    Just a datapoint: on Saturday I ordered two Smart Covers on Apple.com. The orange one is estimated for delivery on April 7th, the gray one for March 15–18. It looks like their estimates for color adoption may have been off.

    • ldb

      They were totally out of red ones at the local store, and the red one I ordered for my wife still hasn't shipped (my tan one shipped day 1).

  • CCBS

    I have always strongly believe that the reason Microsoft doesn't have a tablet version of WP7 is that they want to prevent margin erosion on their Windows license. It is $45 compared to average $15 price difference.

  • Walt French

    @CCBS, thanks for the information vs a very crude SWAG by me. Sorry I didn’t label it as such.

    Sounds like you’re a likely person to take the better guess at Moto’s total costs when those upfronts and commitments are taken into account. I’ve been trying to see how leveraged nVIDIA is to the number sold; I can only make even rougher guesses about how profitable Tegra2 can be, given nVid’s statement of $500 MM development expense and the rather pessimistic unit estimates that are dribbling out.

    Re ARM I was going purely on the assumption that their revenues are enhanced the more demand they find for high-power designs vs the simpler designs

  • kevin

    Well, the Xoom has the hardware to make the iPad 1 look slow, but for some unknown reason, Moto didn't just come right out and say/show it, nor show the fantastic use of the excellent camera lens. Perhaps they were missing the right/comparable apps to use to show it …

  • Fanfoot

    I was lusting after one of the leather ones, but after cracking the box open in Best Buy, the 'leather' ones aren't really. They're some kind of leather/plastic composit or something. Doesn't smell or feel much like leather to me. And the plastic ones are much nicer than last years fuzzy version that got dirty when you breathed on it, so I think they're better than I expected. I do think Apple reserved the better colors (red, black and dark blue) for the leather though. Surprising they allowed the pink to appear as a plastic color option.

    • ldb

      > Surprising they allowed the pink to appear as a plastic color option.

      Probably guessing tween girls might not have $80 for a leather cover…

    • WaltFrench

      From the fine print on Apple's website: “The leather Smart Cover is crafted from high-quality, naturally treated material that gets its color from a rich aniline dye. Some color may rub off during use.”

      I'm not an authority on this stuff, but I AM willing to give better than even odds on a wager: if Apple says “leather,” it is the actual hide from a mammal, likely a cow. Takers?

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  • Steven

    Now, that's funny: the prospect that Apple will make more money off Smart Covers than competitors will make off their tablets.

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