Categories

The case for the iPad's future

The question of low end disruption should be a concern to any manager. It’s one of the most important sources of growth and has led to a vast amount of wealth creation.

Apple was an early low end disruptor by selling personal computers at a fraction of mini-computer prices. Toyota also offered “cheap” cars as an entrant in the market. Pixar made blockbusters for a lot less than live action studios. Google offers good enough office software without a license. Finally Microsoft built its whole business on low-end business software at knock-down prices.[1]

All these entrants made fortunes often at the expense of entrenched incumbents. Disruption grows the pie but also transfers a lot of value away from existing competitors.

So it should not be surprising that new products like the iPad should be scrutinized for their vulnerability to low end disruption. Brian Caufield asks the question if Apple has any future with the iPad given the potential for $99 tablets.

The question is indeed why not introduce an ultra-cheap tablet, for example from Amazon, which makes up for the low price with an innovative business model like selling content or user behavior data. After all, game consoles are sold this way. This is the classic razor/razor-blade business model.

The answer to why not is actually not simply that the economics don’t work. They might work some day even if they really don’t today.

The answer to why not is that the iPad is not good enough.

Disruption (low-end or otherwise) happens when a product over-shoots the market. It makes sense to compete on a new basis, be it low price or convenience or customization, if the prevailing basis of competition has led the prevailing products to be more than good enough. If you look through all the examples of low-end disruption, you’ll find that the incumbents were motivated to flee up-market and to continue to improve their products even though they exceeded the demands and expectations of mainstream buyers.

For the iPad to be vulnerable, it has to be way better than the mainstream users’ needs. Which asks the question of what needs are being served. If it’s book reading, it probably is more than good enough. But if it’s replacing a laptop computer, certainly not. Being too feeble is the most common complaint about the iPad. Being a bloated over-functioned and overly complex solution looking for a problem is definitely not on buyer’s list of concerns.

So on this basis, the iPad and other tablets pass vulnerability tests with flying colors. The product is woefully inadequate for mainstream computing.

The consequence is that people will yearn and beg for more functionality and will drop the last generation for the next without hesitation. This pattern of breathless upgrades is symptomatic of a product racing up a trajectory of improvements which are relevant to buyers.

So until buyers find the n+1 version of the iPad to be superfluous and over-specced, having too much battery life, too big a screen, too much storage and with more speed and bandwidth than needed, the iPad need not fear the low end.

—-

Notes:

  1. Other classic low-end disruptors are: Wal-Mart, GE Capital, Toys ‘r Us, Sun Microsystems, Dell, Hyundai, MySQL, Amazon, Visa, Embraer, E-trade, Macy’s, Japan Steel, Circuit City, Home Depot, Yahoo Travel.
  • http://twitter.com/adamson @adamson

    Wouldn't another leading indicator of low-end disruption also be that the incumbent(s) have become increasingly commodified and therefore the benefits they offer have diminished but they have not (been able) to reduce their price proportionally?

    • Horace Dediu

      Being commoditized can be defined as being over-serving. If improvements in a product or service are not valued then you cannot charge more for it even if you make it better. That means that all products will be priced the same and thus become commodities.

      • Anonymous

        I think there is an argument here for the iPad line to be forked – much like the Mac. The iPad (1) is arguably, already good enough for a large cross section of computing needs, particularly for older less OS savvy users. Apple could easily discount this model and own the base model market sector, tho’ the BOM limits ultimate pricing. The Apple branding should preserve profit.
        I totally agree that the iPad(2) is ‘not’ yet good enough to meet mainstream expectations and Apple will choose to meet those requirements in small steps to maximise model life and OSX/iOS integration and arrive in a more polished form compared to a similarly marketed Windows 8 machine.
        Funny how Apple games the ‘spec’ war to extend the initial concept over a product’s lifespan allowing rapid amortisation at every stage improvement.

  • AlleyGator

    Posts like these are why I love your blog. Great theory.

  • Mike V

    I'm sure that you meant iPad, in paragraph seven, not iPod. Otherwise, assuming that your analysis is correct, this seems to perhaps speak somewhat to the an indication of the point at which the "tablet" market might begin to reach "maturity". My suggestion is that, the appearance of market disruptors is often one of the first signs of maturity in a market…

  • John Kaufman

    Thank you for your refreshing analysis, which has already flushed out the residue of silly left after reading Caulfield’s article. Thank you for your excellent website and the interesting comments and links you share on Twitter.

  • http://mendax.org WyldKard

    I don't see how the iPad isn't adequate for mainstreaming computing, unless you're defining "mainstream" differently than I am. When I think of mainstream, I think of what the average person does with their computer every day, like e-mail, surfing the web, writing documents, etc. The iPad is more than adequate for these tasks.

    • Childermass

      It is a good challenge. 'Mainstream' could mean 'traditional technological requirements' or 'what most people use them for'. I'm with you in wanting to talk about what most people use them for. Too much of the conversation about technology is driven by technologists who are often far too knowledgable about the technicalities to embrace the social and commercial consequences of what is happening. If you have lived your life pushing these machines to the very limit of their functionality it must be pretty disruptive (!) having folk wanting to talk about sufficient technology, or the computer for the rest of us.

      This may be where HD's analysis has a crack. Of course iPads can get much better and it is a fairly safe bet Apple have three or four years of improvements lined up for us. But do they really need to 'replace a laptop computer'? It seems to me the laptop is inappropriately complex and powerful for the mass market and its needs. We simply had nothing else that allowed us to write some reports and letters, work out some fairly straightforward spreadsheets, prepare presentations, deal with our emails, browse the web and – in my daughters' cases – keep up with our social sites. The laptop was always mostly redundant. Now, with the iPad, for most of us they are completely so.

      This may make the iPad 'better' than it seems at first blush.

      • pvt_zim

        And do some of these things on the loo :P (Only half kiddingly, there seem to be a tabloid or a car magazine in the toilet in at least a third half of the households I've been to. May be a local thing though.)

        On a more serious note: waterproof iPads may sell.

        Excuse the joke, I couldn't agree more with your post.

      • http://profiles.google.com/marcosmalo Mark Mayer

        That is one of the jobs for which a laptop is well suited, but overkill. An iPad or iPod is sufficient.

        There is no doubt that we will see the iPad’s specs improve, but I don’t think this will drive demand as much as improvements to the software, particularly the UI. I think once the iPad gets a high res screen, all other hardware improvements will be incremental.

  • Sam

    Great article, as usual. I noticed a minor typo. "The answer to why not is that the iPod is not good enough" should read "The answer to why not is that the iPad is not good enough."

  • r.d

    if Apple brings out the retina display next year then
    they will keep the current one with reduced price.

    ipad is a computer those who have never had a computer before (Senior citizens).
    ipad is a new tool for business (fashionable).
    ipad is also great couch device (leisure, think rich people).

    Apple also has brand, quality and innovation mindshare of the public so
    they will get the benefit of doubt there as well.

    So Apple just needs to serve the poor. ipods didn't get popular
    until below $200. so iPad has to cost less than $100 to build.
    that is tall order at current screen and battery prices.
    lithium and other rare earth mineral prices will only go up in the future.

    • YossarianLeaves

      iPods popularity exploded with the mini, priced at $250 http://www.apple.com/pr/library/2004/01/06Apple-I… As of now the Touch is their biggest selling unit.

      The senior citizen will need a computer to use his iPad

      Business IT departments are not slaves to trends and fashions they tend to go with needs, hence XP continued usage.

      Apple's screen and battery prices are v.low as they ordered years in advance, see T.Cook

      Lithium batteries been around since the 70s: prices gone down, performance gone up since then .http://en.wikipedia.org/wiki/Lithium-ion_battery

      • huxley

        With iOS 5, Apple is removing the requirement of a host computer for the iPad/iPhone/iPod touch. Backups and updates will occur via WiFi, not computer needed.

      • YossarianLeaves

        Present tense was used in the original comment. Still stands.

      • Space Gorilla

        Heh, just to nitpick, "senior citizen will need' is future tense. And iOS 5 is coming up very soon, iPads will be independent devices before the end of this year. That's probably going to fuel even more growth and take an even larger bite out of PC purchases.

      • r.d

        I am talking about Larry Ellison's famous quote about
        computer industry is Fashion driven industry.
        Same crap is repackaged as new with better sounding buzzwords.

        Enterprise has always had tablets and toughbooks which they had
        been using pen. If it was up to IT then iphone and iPad would still not be approved.

        There is only enough known supply of lithium to create 100 million hybrid cars
        not to talk about computer, electronic gadgets. same goes for copper, silver, Indium, etc.
        It is question of supply not whether battery technology has advanced far enough.

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

    I don't think the iPad will ever replace the laptop / PC. It will and should be disruptive in different ways. As long as consumers and businesses think of the iPad as a smaller PC, or even a larger phone, the full potential of the iPad won't be realized. The iPad's disruption should be, and hopefully will be, in the creation of new, previously impossible use cases. From a business perspective, we talk a lot about how the iPad can be used to shorten sales cycles, improve customer service, and overall improve customer relationships by more visual / immediate interaction. On the Propelics blog, we write about this extensively. Here is one blog post on the topic: http://www.propelics.com/2011/08/26/redefining-mo

    • Childermass

      I suppose it depends on what you mean by 'replace'. If we are talking technologically the chances of an iPad having the computing power and connectivity of a good laptop or a desktop machine seems remote today, but on your own timescale of 'ever' it will (or its successor will) one day replace them.

      In the field of appropriate usability it already is replacing them. In my organisation alone our field trainers use only iPads and have no other computer either with them on the road or at base. They have an email requirement, use Roambi for their BI needs, use them for note taking and report writing, link with our online expenses system for prompt reimbursement, and have our own training materials (as eBooks and Keynotes) as well. They also load them up with fun stuff to while away the airport hours. Our factory is trialling them for better JIT assessment stations, our Personnel people use them and we are about to replace laptops in the Board room as well.

      We have not bought a traditional office computer all year.

      This is so because the iPad is 'sufficient' technology for these and many other uses. Not as powerful as the old machines, but far more appropriate.

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

        These are all great uses for the iPad. Sounds like your organization is really ahead of the game when it comes to this type of thinking.

  • Ángel Lamuño

    Just a detail. H. says: “If it’s book reading, it probably is more than good enough.” Not there yet. Whenever the iPad has a retina display, it’s significantly lighter, and has a good iBooks store, it will be good enough for book reading.

    • http://profiles.google.com/marcosmalo Mark Mayer

      In my personal experience, the iPod Touch (albeit the one w/ retina display) was good enough for reading for a few hours in bed before sleep. I was living in fairly primitive conditions with only a small generator for electricity for three months earlier this year. I used the generator to keep my devices charged and for operating power tools.

      I’m not saying that the iPod or iPad are better than the Kindle (although, in my case, the kindle’s lack of a backlit display would have made things worse), but that they are indeed good enough.

      • Anonymous

        The iPad has a much less pixels per inch density than the retina display equipped iPhone 4 & iPod touch 4.

        I have read entire novels on my iPad, but it definitely is nowhere near as good as the retina displays for reading text.

        It’s why I think the amazon tablet is a risk if it’s not a retina level display, as it will discourage kindle book sales on it. Trouble for amazon is a retina level display will push up their tablet to iPad level prices.

  • Kevin

    Would you consider the CD replacement of vinyl & tape a low-end disrupter? It didn't get significantly cheaper, but it had better quality music (to most people) in a less damaging format and got rid of some of the annoyances (side changes). People rebought tons of music to replace a less quality system with a better one for the same price. Same for DVD and VHS replacement. Those were just format changes.

    In fact I think DVD then BluRay opened itself up to a low end disruption by becoming overly complicated and adding "features" for content producers rather than end users (mainly in the form of unskippable ads).

    • Andreas

      No, CD was mostly a sustaining innovation: It improved features along the lines of what customers care about (quality, convenience). It was not significantly cheaper. It did not shake up the music industry. (except, maybe, for producers of raw vinyls; but this would have to be evaluated from a different perspective, the customer then being e.g. the music companies).

      After the CD further quality improvements where over-serving for customers and disruption began via pirating & the iTunes store.

      For movies, I was suprised of the success of HD material which has kept blueray at least alive. Watch how the industry moves to 3D (upmarket) to flee youtube, netflix and co. This is still an oversimplification as content industries consist of a set of value networks around different formats and use cases and need separate analysis on each.

      • Anonymous

        Movies are an interesting product, Bluray succeeds because HD content delivered over the Internet is low quality and/or expensive for end users as they pay for both the content & it eats into your data cap.

        And 3D movies are actually very important to the cinema business, as 3D projections are very, very difficult to pirate. Once cinemas have finished converting all there projectors, expect all major high budget Studio releases to ONLY be released in 3D cinemas (2D will still remain an option for inhome consumption).

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

      It depends on where you look for the disruption. I think that the CD was disruptive for the device manufacturers. I don't have a clear picture, but I don't think that the manufacturers of vinyl and tape players got any big piece of the CD drive/player market.

      For the content providers the CD may have looked like a sustaining innovation initially, but their distribution channel was in fact heavily disrupted: all the content providers claim big losses due to content replication outside their control.

  • OpenMind

    Great line: "If you look through all the examples of low-end disruption, you’ll find that the incumbents were motivated to flee up-market and to continue to improve their products even though they exceeded the demands and expectations of mainstream buyers." One to look out for.

    • John

      That's exactly where Apple is with the Mac. Nothing wrong with it, except that the volumes are low. Profits are totally fine, though.

      • Anonymous

        Not sure in Macs fit entirely into the category of fleeing up-market.

        If anything, over the years Apple have gone more and more consumer oriented with their Macs – whereas they were reliant on the creatives and power users in the past.

        Taking inflation into account, I reckon Macs offer far better value for money, today, than ever before even though Apple still aim for the high end consumer – it’s a less up-market category than the designer / professional market.

        The above category average growth in Mac sales seems to bear this out.

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

    Thought provoking.

    If Amazon can make the razors and blades economics work then I see no reason why they couldn't create strong demand for their tablet at a lower price point. Not necessarily disruptive to iPad, but at least giving it some real competition.

    But of course that's a big if, so do you have any view on that? Could they make razors and blades work?

    (I liked the quick analysis you made on another comment thread some time ago when asked if Apple could subsidize the iPad with content revenues from the app store, iBooks etc. — you convinced me they couldn't)

    • Horace Dediu

      I'm reminded by the line in an iPad commercial that says that Apple sees it as "just the beginning". To accept a razor/razor blade model in effect means that the iPad today is the end of what the product is defined as.

      Keep in mind that in that model the device must have a very long life. Long enough to have enough blades sold. Consider the lifecyle of consoles. Four to five years as a minimum.

      • http://twitter.com/Niilolainen Niilo

        Could a cheap Android tablet from Amazon be justified (at least in their minds) as a defensive move? (and I am not saying this is a good move for them!)

        Here’s the logic:
        – Tablets displacing dead trees, DVDs and even eReaders as the dominant platform for content consumption
        – No credible tablet competitors for iPad on the horizon. Oh dear, Apple has a lock on content distribution via the app store. How are we going to sell books, movies, music?
        – They must be stopped at all cost! Hang the expensive! Flood the market with cheap AmazonPads…

        I am reminded of your Critical Path episode where you discuss Google’s development of Android as essentially a defensive move

        This could combined with some “build a userbase and work out how to monetize it later” thinking, which has long been popular with internet companies.

        Amazon currently has 6B USD in cash, this would be enough to push out 60M tablets if they took a 100 USD loss on each up front.

        Companies have done stupider things with that kind of cash.

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

      The problem with the Razors/Blades analogy and tablet sales is that in this case, the "Blades" – the software and music content are not expensive enough to make the market viable. Books and Movies are a bit more expensive, but not enough, imho. Free and 99cent apps will never be able to make enough money to pay for the device. Apple runs the iTunes store at break even.

      The model works for game consoles like the XBox and PS3 because those games are in the $30-$50 range.

      Did you know that in order for Amazon to sell bestsellers on the Kindle at 9.99 they have to pay 12.99 to the publisher? They use the bestsellers as a loss leader to encourage people to buy Kindles and other eBooks. The Kindle is very cheap to make and they make money on each one.

      • davel

        I think another problem is that in the console market the games are specific to the platform. Music, movies, etc are not specific to a platform.

        I wonder about the business model of selling hardware for a loss. Why would Amazon do this? Apple sells enough tablets themselves to generate a market. Why would you lose money just because?

        I think a better model is create an html5 app so you don't pay Apple's toll. This way you have cross platform availability and become the portal for the things you want to sell. Of course they won't be able to leverage Apple's infrastructure, but it looks like they don't want to do that anyway.

    • poke

      I think it's a very silly idea. Apple has the biggest online digital retail presence. Apple has the most popular tablet. Apple gets the best component prices. Apple has the deepest pockets. If it was possible for anyone to subsidise, it'd be possible for Apple to subsidise. As it stands, Apple breaks even with its iTunes store and couldn't reasonably subsidise the iPad. How is Amazon going to do it? If anything, Amazon wants to leverage its low margin ecosystem so it can get into the more profitable tablet business, rather than sell a tablet at a loss to sell more stuff with razor thin margins.

      • http://profiles.google.com/marcosmalo Mark Mayer

        Amazon has an infrastructure for selling and delivering physical objects, not just digital ones. They quite possible have the best infrastructure for this. I am not sure why people assume that the “razor blades” Amazon would want to sell on a subsidized tablet will be strictly digital.

  • Morten Jacobsen

    The ipad, with Apple keyboard, is better than my MacBook for pure writing, because of the new writings app. Until iCloud arrives, it isn’t suitable as a standalone working device. For reading the web and books it’s good enough. Even iPad 1, which I have!

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

    It's part of Apple business model in general to innovate enough each iteration of a product to make customers long for it.
    It's not only to innovate in new product, but to make enough changes on new iterations of a product. Now how understand that this could be to protect the product from low-end disruption.

    Some example: ipad first came without camera to leave space for improvement, mac iterations are separated by a long time (for computers standards) so the new one are effectively more valuable than the preceding generation (speed increase always a lot for instance).
    They plan product improvements from the start, they don't just put everything technologically available into it.
    I have always thought that was just for maximize income considering that competitors where not good enough to leverage the weakness, now I thing it can be to delay commotidization and defend from low-end disruptors, considering that the relative weak of the not state of the art products (like mac with a core 2 duo in 2011) can be an acceptable price to pay for high-end margin business protection.

    • pvt_zim

      This thought has also occurred to me. My current theory is that it has more to do with the size of their R&D:

      Nokia employs as many people to develop its smartphone software as Apple does to develop all its products
      http://www.asymco.com/2011/02/04/nokia-employs-as

      And they understand that they — anybody — can not manage a bigger R&D effectively and efficiently. (I was taken aback when Jobs referred to the Mythical Man-Month in one of his keynotes:
      Steve Jobs’s Closing Keynote at WWDC 1997
      http://www.youtube.com/watch?v=3LEXae1j6EY)

  • pvt_zim

    To speculate on the future of the iPad I think we have to factor in the potential size of the market. Here's a half baked, morning commute idea on how to estimate it based on a couple of possibly wild assumptions.

    I figure that the size of the tablet market will be at least as big as the current PC market. It's based on my assumptions that

    a) the introduction of the tablet paradigm will increase the number of potential customers like the GUI increased it as it replaced the command line interface, and

    b) the number of tablets in a household will be higher then the number of PCs in the household because of the more personal nature of tablets.

    (Of course the tablet/PC/smartphone replacement factors, among other things, should also be considered but I'm aiming at an order of magnitude number.)

    I don't have the acumen to come up with the figures — I hope someone here does — but it surely is a huge number.

    If this chain of thought is correct the question that comes up is how many tablet suppliers do we need to satisfy this demand? Will a single supplier be able to do it alone? (Which also raises some philosophical questions: Will it benefit society if Apple was the single supplier of tablets? Will it benefit Apple?)

    I happen to believe that the tablet form factor is here to stay and it will be as big as the above raw calculation suggests. I also happen to believe that Apple, as a single supplier will not be able to monopolize the tablet market no matter how much of a head start it has. (I have read several comments in several discussions along the lines of all entrants to the tablet market are already doomed.)

    We have only seen the first great product accompanied with a successful business model. We are yet to see if there are other ways to approach this market, like the subsidized HW model of gaming consoles mentioned by Horace above. Kudos to Apple, they are doing their best to make entering this market a leap of faith but I think a lot of companies are gathering their faith.

    As far as the iPad I think it will be the high end choice on a blossoming tablet market in the medium term. And I also think that it will stay my choice :)

    • http://twitter.com/speakingvolumes Rip Robinson

      You have read comments “along the lines of all entrants to the tablet market are already doomed”, because it is not entirely clear that there is (yet) a “tablet market”.

      I think you are quite right about the potential for multiple iPads/”tablets” per household and thus a potentially larger market than PCs. But you said it yourself when you shifted emphasis between your second and third paragraphs — from iPad alone, to “tablet market”.

      What commenters are saying: There IS an “iPad Market”; the jury is still out on there being a “tablet market”.

      Like Horace said, “Tablet” manufacturers have to first compete with the netbooks, smart phones and iPod Touches. That’s one of their barrier’s to entry. These other three things (even netbooks) are good enough when it comes to the jobs that generic tablets may be hired to do.

      But no-one really wants a netbook (a dumbed down PC) after seeing an iPad. So the other companies have to make tablets to move forward into the post-PC world. But why would anyone want an ill-conceived tablet, if it is essentially the same thing as the dead netbook in a slightly different form factor, and no better than my phone or iPod?

      These tablet makers are faced with rethinking their products with a new business mindset. It’s a new paradigm: Different OS, different apps, ecosystems, cloud computing, seamless syncing, different and new uses, etc. Companies are going out of business, or getting out of the business, left and right after trying their hand…

      Personally, I just don’t see how these PC Guys can just walk into the “tablet market” and make tablets that sell; when Apple, as an engineering and software company, have been doing it for ten years.

      ————————–

      I am wondering if the same thing won’t be true of the “ultra-light laptop market”. There we have another potential market that PC Guys are having a hard time just walking into. Of course this is an evolution of the wider laptop market, and it is not an entirely “new” category like tablets (take 2); but “ultra-light” now seems to be a definable market segment that is replacing the now defunct netbook market. Like phones and the smartphones replacing them in Horace’s countdown, there will at some point be no “ultra-lights”, just laptops. But it’s not as easy as it looks to make good ones.

  • MOD

    If the Amazon Pad does not impress NASA, they will not put it on the Space Odyssey spaceship.
    http://www.youtube.com/watch?v=b_O_dOMG3oo&fe

  • Jamie

    To be fair, Pixar's feature budgets are still in the ballpark of $100 million. They get a great return but their cost of production is average, or even high compared to other family-friendly production.

  • http://theorangeview.net Aaron Pressman

    Horace, you're confusing the iPad as a disrupter of the PC market with the tablet market as it exists now. If, as you argue and many, many reviewers also say, the iPad is not good enough to be a PC replacement today then people are probably buying it for other reasons. And the iPad is very close to overshooting the market for many of the most common uses of tablets today. It's all games, email, browsing and video (see http://stephenslighthouse.com/2011/04/26/google-s… for example). Laptop replacement, spreadsheets, Photoshopping are no where in sight.

    Seems almost self-evident that Moore's law et al will allow a low end disrupter, no? Apple must race to make the iPad more suitable as PC disrupter to avoid being disrupted as a maker of tablets for light entertainment needs.

    • Horace Dediu

      A low end iPad exists and has existed for a while. There were many Android tablets last year for $200. There will be many more. It's just that few will be sold relative to the iPad. The most obvious disruptive challenger is the Kindle. Another is the iPod touch. These products have better chances but will take a while to become replacements. They need to keep improving over the next few years and they need to remain profitable.

      • Canucker

        This is going to screw up your commentor counts Horace!

        Although Caufields analysis was deeply flawed, there is clearly an opportunity for a different business model – subsidized tablets. The problem is that, unlike phones, the margin from app and musics sales is set by Apple’s standards and is too thin for a razor/blade model. Amazon may have a shot, but this will mean they will need to sink a lot of money into achieving critical mass. If Amazon does go that route (i.e. sell the tablets at a loss and assume they are of reasonable quality) then the other Android tablets will be forced through the same eye of the needle and they will not have the backend sales of Amazon to make back their upfront loss leader. This would be very interesting as it would entail a race to the bottom for the non-Apple vendors who are already struggling. It’s a kamikaze race! The TouchPad has, perhaps unwittingly (because I don’t think HP had a clue of what it was doing), set the accepted price for a non-iPad device. Dog eat dog while the lion watches from the hilltop, licking his lips.

      • Anonymous

        I would argue that subsidized tablets are not new. Let’s face it, as soon as 3G tablets appeared, thoughts of subsidies emerged. But no one wanted to sign a multi-year contract, so they failed.

        Next up were newspaper subscriptions. With these, the silence is deafening.

        Now, we have Amazon and a theory. The theory, of course, is that we’ll see cheap Android tablets paid for by book purchases and movie rentals, I guess.

        How many books will people buy? How many movies will they rent? Where will they consume the content? On the cheap tablet? How long will it take to make a profit on this plan? In this economy?

        It just doesn’t sound like a sound plan to me. The target market that this will appeal to doesn’t seem like the kind of market that will make enough purchases soon enough to turn a profit.

      • http://profiles.google.com/marcosmalo Mark Mayer

        Seems to me that Amazon sells more than books and movies. Have you looked recently at all the products they have available?

      • Anonymous

        eBooks friend. and Amazon’s video on demand.

        You think the plan is…what? People will now start shopping at Amazon if they never have before because of a tablet?

        If that is the plan, or the plan is that people will shop more and buy say…used $1.25 paperbacks or $4 hdmi cables from Amazon’s third party stories, than Amazon’s tablet is well and truly doomed.

      • http://profiles.google.com/marcosmalo Mark Mayer

        People might shop more at Amazon with an Amazon tablet, assuming it’s a frictionless experience.

        You really seem unaware of the wide range of products on offer at Amazon and from Amazon (and not third party vendors), if the only examples you can think of are used mass market paperbacks and HDMI cables.

        There might even be sales models we haven’t yet considered: in-app purchases of physical products, for example. Think of it as product placement on steroids.

        One of my favorite iOS programs is Animated Knots by Grog. Imagine if Grog could sell rope and related materials/products directly in the app, either getting a commission from Amazon or through his own Amazon storefront. Amazon profits either way.

        Go look at climbing ropes and boating ropes on Amazon.

        A recipe app could sell ingredients in-app, especially if they’re a little hard to find locally. Were you aware that Amazon sells food products? Go take a look. Do a search for squid ink in the grocery section.

        Unfortunately, Apple’s app store policies make this sort of thing non-viable for an iOS app. It’s doable on Android, but there’s a lot of potential for fraud and abuse on the Android Market. I think Amazon would want to have tighter control and better integration, which they could have with their own tablet.

      • Anonymous

        Sure. That’s it. I don’t know what Amazon offers for when I go to the site, I am blind. I’ve never heard of Amazon before last week either. You think that.

        I simply don’t believe that an Amazon tablet will cause people to shop more, certainly no enough to cover a significant subsidy on the device.

        We’ll find out soon enough.

  • http://tingilinde.typepad.com/omenti/ steve crandall

    A minor point, but Pixar's costs are equivalent to many of the other blockbusters. Their difference is that, with the exception of one movie, they have created films that resonate with the audience. Their special sauce is the ability to spin a great yarn.

  • Vikram

    A thought provoking post as usual.

    One quibble, not sure if Pixar is applicable as a low cost disruptor – Pixar didn't make particularly cheap movies in its inception and certainly not now when an average Pixar film approaches $200M which is the upper range of most live action films. Pixar pioneered a new format in Computer CG films and simply focused and executed on making good movies – the rare combination of talent and execution in Hollywood.

  • Pingback: Wednesday links: losing the lost decade | Abnormal Returns()

  • davel

    I think Brian Caufield is saying that Amazon will offer a substitute for Apple's tablet at a fraction of the price shifting consumers to the cheaper alternative.

    However, your stance is very interesting although I do not think it addresses the main point about getting the same for less. I have doubt's that Amazon will or could do this. Of course if they are willing on taking a loss for every item sold they probably can sell significant quantities as HP has been very successful at the great price of $99 for their discontinued product.

  • John

    A few thoughts:

    1. Arguably the "retina" display is overshooting mainstream needs on the display. I don't know how much this adds to the price of an iPad or iPhone, but it strikes me as an area of diminishing returns. I realize some users value the retina display, but I think they are a higher-end niche. I suspect most people would gladly trade $25-$50 off the price to get a non-retina display.

    2. Regarding other hardware features of the iPad — I suspect it's closer to meeting mainstream needs in terms of hardware than you're suggesting. In terms of GPU performance, it's very nearly there. In terms of CPU performance, the A6 might get us there.

    3. I think the area where the iPad has the most room to improve is in software and services (iCloud). I suspect Apple can innovate along those lines for another 3-5 years and continue to increase the appeal of the device to mainstream users. I also think this is the area where the competition is weakest.

    4. Apple isn't stupid. They aren't going to be disrupted at the low end on the iPad. They recognize the threat of low end disruption with the iPhone and have been moving to address it, first with the iPod Touch, then with the $50 3GS. I suspect that as they catch up with demand for the higher priced versions of both the iPad and iPhone, they will then move to introduce lower priced versions. No point in selling low price versions when they can't meet demand for the high priced versions.

    • Heismine

      The iPad doesn’t have a retina display.

    • Anonymous

      The Retina Display is essential. We are moving magazines and photographs and documents from ~300 dpi printers to iPads. The iPads need to be ~300 dpi.

    • Anonymous

      “Retina” hi-res displays cost a bit more but the dominant costs are per square-inch, with incremental costs per pixel. Don’t forget that drawing more pixels demands more CPU/GPU power (meaning you need a faster chipset and battery), and Displaymate sez more pixels per square inch means more illumination (battery) requirement, too, enough to be significant. But mostly, methinks, the concern is the brightness of the backlight and the size of the display.

      I’ll be happy for a higher-res screen, but think it’s pretty incremental in terms of perceived quality: an iPhone pixel when perceived from a 9″ distance distends about the same angle as an iPad pixel held in your lap. All the iPad billboards I saw prior to iPad2 (there was one every 100 feet along 101 in SF) showed the iPads in a user’s lap; my casual use of my wife’s iPad around the kitchen table doesn’t get much closer. Yes, stick your nose closer to the screen and the hi-res display looks richer, but that’s not the main use case, nor would most people say is the limiting factor of quality.

  • rashomon

    The iPad currently has the role of the universal tablet — the tabula rasa configured to serve any purpose via software. One way to compete with it may be specialize: find changes in form factor, size, cost, display, etc. that will help certain consumers for certain functions to choose the competitor over the iPad. Perhaps Amazon, for instance, will optimize for book-reading functionality with a Pixel Qi sunlight-readable display while still providing the ability to see video and other web-browsing functionality that is limited by the e-ink display of the Kindle. Perhaps for some consumers, the iPad is already too good in some ways, while not being good enough in others. If there's a big enough market around a different feature set, I'm sure some competitor will find it. I'm also pretty sure that's going to be very tough task with a rapidly evolving iPad that will keep getting better at essentially everything.

    • John

      Good point. Apple has taken the position that all specialization will take place in software. Their sales to date are a strong argument in favor of their position, but it's a big market, and it's not hard to imagine that it's big enough to support more hardware specialization than what Apple wants to provide.

      Of course, with the dock connector, third parties already can provide a certain amount of hardware specialization to the existing iPad. But clearly having a feature integrated is better than an add-on.

    • Anonymous

      This is already what Amazon does with the Kindle and its funky toilet paper display.

      iPad is a general purpose PC, competing with general purpose PC’s from Microsoft in the $500 consumer PC market. It is not going to be easy for anybody else to come in there, not even Amazon. Microsoft had the $500 PC market to itself ever since there was a $500 PC market. Apple is the interloper, selling in that market for the very first time. Maybe Amazon will have a take that works, but I’m not optimistic.

  • Bob Forsberg

    Apple is worried as is Mercedes, BMW and Lexus about lost customers to KIA. There is always a market for marginal product if the price is low enough.

    • Roo

      They should be… remember just not so long ago Mercedes and BMW was not worried about Toyota (Lexus). More often then not the innovators began there market disruption with marginal products with low enough price, much like Toyota in the 70’s.

      • Anonymous

        Amazon is not Lexus or even Toyota. Kindle has done well, but it does not sell anything like iPad numbers. And Kindle is not even $99 yet. The idea that something iPad-like will be $99 is crazy. It costs about $99 to take your order and ship you a box of air with a warranty attached to it. If you want an actual product, that is extra.

        Apple should not be worried. Go and look at their numbers and then reconsider whether you think they should be worried. Palm just stopped making devices, HP just announced they’re going to stop making PC’s, LG is about to get out of making devices, Motorola was sold twice in 1 year and nobody knows that is going on with it now, Microsoft Windows Mobile 6 from before the iPhone still outsells Windows Phone 7, Nokia is evaporating before our eyes, Acer just lost $250 million in one quarter, their first loss ever, and every mobile platform other than iOS just suffered a Windows-like plague of malware and viruses.

        Apple is the only company out there that should NOT be worried. They are the only one that spent the last part of the 1990’s and first part of the 21st century building a 21st century operating system. They are the only one that has built a 21st century iPod-type supply chain. The most popular low-end PC is iPad and the most popular high-end PC is MacBook Air and nobody else even knows how to make a decent clone of either of those even at the same price points, let alone make something better. Most popular phone is iPhone and media player is iPod touch. Apple has set the pace for everyone else.

      • http://profiles.google.com/marcosmalo Mark Mayer

        Where ever it is that you’re buying your air, you’re being overcharged.

      • Anonymous

        Amazon is not Lexus or even Toyota. Kindle has done well, but it does not sell anything like iPad numbers. And Kindle is not even $99 yet. The idea that something iPad-like will be $99 is crazy. It costs about $99 to take your order and ship you a box of air with a warranty attached to it. If you want an actual product, that is extra.

        Apple should not be worried. Go and look at their numbers and then reconsider whether you think they should be worried. Palm just stopped making devices, HP just announced they’re going to stop making PC’s, LG is about to get out of making devices, Motorola was sold twice in 1 year and nobody knows that is going on with it now, Microsoft Windows Mobile 6 from before the iPhone still outsells Windows Phone 7, Nokia is evaporating before our eyes, Acer just lost $250 million in one quarter, their first loss ever, and every mobile platform other than iOS just suffered a Windows-like plague of malware and viruses.

        Apple is the only company out there that should NOT be worried. They are the only one that spent the last part of the 1990’s and first part of the 21st century building a 21st century operating system. They are the only one that has built a 21st century iPod-type supply chain. The most popular low-end PC is iPad and the most popular high-end PC is MacBook Air and nobody else even knows how to make a decent clone of either of those even at the same price points, let alone make something better. Most popular phone is iPhone and media player is iPod touch. Apple has set the pace for everyone else.

      • Anonymous

        Amazon is not Lexus or even Toyota. Kindle has done well, but it does not sell anything like iPad numbers. And Kindle is not even $99 yet. The idea that something iPad-like will be $99 is crazy. It costs about $99 to take your order and ship you a box of air with a warranty attached to it. If you want an actual product, that is extra.

        Apple should not be worried. Go and look at their numbers and then reconsider whether you think they should be worried. Palm just stopped making devices, HP just announced they’re going to stop making PC’s, LG is about to get out of making devices, Motorola was sold twice in 1 year and nobody knows that is going on with it now, Microsoft Windows Mobile 6 from before the iPhone still outsells Windows Phone 7, Nokia is evaporating before our eyes, Acer just lost $250 million in one quarter, their first loss ever, and every mobile platform other than iOS just suffered a Windows-like plague of malware and viruses.

        Apple is the only company out there that should NOT be worried. They are the only one that spent the last part of the 1990’s and first part of the 21st century building a 21st century operating system. They are the only one that has built a 21st century iPod-type supply chain. The most popular low-end PC is iPad and the most popular high-end PC is MacBook Air and nobody else even knows how to make a decent clone of either of those even at the same price points, let alone make something better. Most popular phone is iPhone and media player is iPod touch. Apple has set the pace for everyone else.

  • Joe

    Interesting analysis. The same arguments can be applied to the iPhone. Is the iPhone good enough yet? Are the features that will be added to the iPhone 5 addressing real market needs? I think the iPhone is nearing or at the top of the functionality curve. Interesting then, that the rumor mill reports that Apple is prepared to start disrupting their own market with a low cost iPhone. It would appear that Apple agrees with this analysis and is willing to cannibalize themselves rather than let someone else do it. This shows remarkable foresight.

    • Anonymous

      Everything to do with the cell network in all cell phones is not good enough. A clue that they are getting good enough is when the “5 bars” goes away. Also, we want to go to 15-20 hours battery so they just basically never run out if you charge them at night. And voice recognition and artificial intelligence are kind of a wild card.

      A low-end iPhone disrupts Android’s market, not Apple’s. Android is all low-end.

      It is no surprise to me if we see a low-end iPhone. iPod touch is almost a low-end iPhone already, and there are low-end iPods for many years, and the iPad is the low-end $500 Mac that technology pundits have been saying for about 20 years would kill the generic PC industry if Apple ever figured out how to do it. Looks like they were right for once.

    • Sve

      I don’t think the iphone or any smartphone is overserving its market yet. The wifi and 3G is still way too slow. The vast majority of websites are barely rendered properly for the small screen. And interacting with traditional productivity apps like word-excel-powerpoint is awful. And yet it’s a huge disruptive step in the right direction which accounts for how popular they are.

  • SVE

    The not-good-enough analogy rings true. Recall in the first days of the PC era when the Intel 186 was followed by the 286, the 386, the 486, and the pentium? I upgraded every time (24 months) because in each case the performance was not good enough, but hugely better than its predecessor. After the Pentium, I was overserved and slowed my purchases down. Horace notes that the iPad is in a similar situation now as the 286 was then, and we can expect constant demand for upgrades as history repeats itself.

    • Canucker

      I didn’t upgrade from an iPad1 to an iPad2 because the incremental advances (although technically significant) didn’t justify my expense. The iPad1 is good enough. Maybe iPad3…(which fits into your 24 month cycle). But iPad1 buyers were early adopters and the iPad2 hit a major chord (it had to) with broader and more conservative buyers. The only “successful” competitor is the fire-saled TouchPad. Say no more.

      • Anonymous

        iOS devices have a 2 year lifespan. iPad 2 is not meant to appeal to iPad 1 users, it’s meant to appeal to people who resisted iPad 1. The iPad 3 will have new everything compared to iPad 1 and will be a great upgrade for you.

      • Canucker

        I know – and I will know I have become a true Apple fan boy if I ever abbreviate the two year cycle….

    • http://profiles.google.com/marcosmalo Mark Mayer

      Slight correction to your post. The 80186 was never widely used in computers. You’re thinking of the 8086 family of CPUs, the mostly widely used of which was the 8088 in the original IBM PC. The next CPU to be widely used was the 80286, and so on, until Intel learned it couldn’t trademark numbers, which is why the ‘586 was named the Pentium.

  • Andreas

    Horace, from my understanding of the theory there is another early indicator we can look at here.

    A disruption from Amazon would be more likely, if the market segment the attacker addresses appears insignificant and small. This would certainly not be the case, if Amazon chooses to go for a full-featured tablet. So Apple would be/will be highly motivated to take on Amazon, which lowers their chance of success.

    However, isn't Apple's pursuit of all-digital OTA media purchases (music, movies, now books) a strong threat to Amazons business model (maybe even a disruption of sort, due to the changed mix of performance attributes)? And isn't Amazon the incumbent here, reacting (appropriately) to a threat from Apple?

    To help Amazon with its defense I would suggest to focus their tablet on media consumption and not on general computing tasks (if there is a chance to squeeze some costs out this way). This could lead Apple to ignore the Amazon tablet, because a pure media consumption device would not threaten their ongoing disruption of the computing market. Then, in stage two, Amazon could add "good enough" computing features.

    • pvt_zim

      Aren’t we overusing the term disruption? The way I see it Apple has disrupted the PC market and created the tablet market. ( Or not. It certainly looks that way to me but the jury is still out.) What I hope will happen now is competion on this new market. It tends to benefit customers.

      On a related note: Is disruption sustainable in the short term?  What I mean is a successful disruptor will want to exploit the market it created before disrupting it. Chances are that it will not get disrupted on it’s own court for some time. If it does get disrupted I’d argue that it did not disrupt anything in the first place. On the long run it obviously has to work on the next disruption if it wants to stay in business.  Putting it in an other way: Is a market that is continously disrupted a market at all?

      • Anonymous

        iPad is not a new market. It is the same old $500 consumer PC market.

        Before iPad came in, there was zero competition in the $500 consumer PC market. You could have a Windows PC or a Windows PC, whichever one you preferred. Now, after iPad, there is finally competition.

        Apple is the underdog in the $500 consumer PC market. Microsoft has monopolized it for many, many years. So praying for someone to rise up and provide competition for iPad is ridiculous. Apple is right now competing with the Beast from Redmond.

      • Anonymous

        I’d have to disagree, the iPad may overlap with the $500 PC market but it’s not identical to it and this is shown clearly by the number of people who already have MacBooks, even MacBook Airs who also buy iPads.

        The iPad is a new market, which overlaps somewhat with laptops, somewhat with eReaders, somewhat with the larger PMP devices – but also covers areas and use cases that none of them previously did.

      • http://profiles.google.com/marcosmalo Mark Mayer

        Where did you find a Macbook Air for $500 (that wasn’t comment spam)? :D

        Overlapping is enough for the iPad to compete in that market. If it wasn’t, the iPad wouldn’t be cannibalizing the market especially or the PC market (including Macs) in general.

        Indeed, if the iPad was identical to other products in the $500 price point, it probably wouldn’t be stealing sales.

        I’m looking forward to buying an iPad when iOS 5 comes out, and seeing if it will replace my Macbook.

      • Davel

        I think tablets are a new mkt. While it is true the price point is the same the functionality Is not. There are many things the iPad cannot do for various reasons. However it is a very com peeling device. It is a touch with a lower resolution but much bigger screen.

        It’s form factor absolutely differentiates it from PC’s. I can walk from room to room while reading or doing something. I can hold it in one hand. It boots quicker, it has less capacity and it is lighter.

        I rarely use the laptop for personal uses.

  • Giovanni

    I strongly disagree with the current rumor-mongering that Amazon is going to release a $99 tablet. Amazon can't even produce a $99 kindle, even though it's thoroughly tied to the Amazon store, so how on earth could they put out a $99 full-fledged tablet that competes with the iPad? If somebody releases a $99 tablet with a $99 or less bill-of-materials, it's going to be absolute junk. And if it costs them $300 to produce a $99 tablet, there is no way they are going to make up the difference just through content sales alone.

    As far as the comparison to Microsoft and Sony losing money on their game consoles and making it up on games, I don't think that comparison works, because no tablet maker except Apple creates retail software for their own tablets. The games that Microsoft and Sony create go for upwards of $40 each. A far cry from 99-cent music downloads and $2.99 movie rentals.

    • Anonymous

      The issue of the day is that users aren’t paying for content, not that they are paying so much that we can give them free hardware. It is a crazy idea.

    • Anonymous

      Completely agree.

      Argument 1
      Console software and disposable razor blades are very expensive and very profitable. Apple is BY FAR the class of the app store world, and has paid developers $2.5B as of July. Their entire gross cut is $857 million, on every single iOS device ever sold. This is sustainable and profitable because Apple rakes in huge profits on the devices. Amazon would have to sell a LOT of tablets to get to this level, and even then it wouldn’t move the needle on their corporate financial statements.

      Argument 2
      The Kindle was designed to migrate Amazon’s existing book of customers (pun intended) away from the physical medium into a more profitable electronic form. It was also done to make the medium proprietary (a page out of the iTunes playbook). The razor blade model makes sense against this backdrop, but Amazon does not have a strategic need to protect a core business with a cheap Android device.

      Argument 3
      The Kindle is $114, with a $25 subsidy for adverts. This device does much less work than an iPad, and has feeble components. This is an industry leading price for a pure-play, grayscale ereader. How on earth do they expect to offer a real tablet computer for less?

      I fully expect that the rumors are true (but not the absurd $99 price) about Amazon’s tablet ambitions. Amazon has shown a penchant for kicking the can down the road in regards to profits. The real question is whether they can make a $300 product that people want. They will need some level of device profitability, but probably won’t ask for much. They can ask buyers to sacrifice some functionality, but nothing significant. It has to feel great, carry a long battery life, and handle media and the browser well.

      The second question to ask is whether this would be good or bad for iPad. At $300, they would pretty much suck all the air out of the room for every other device maker. Samsung, Asus, HTC, Moto, etc. would all be effectively priced out of any future profit, and they don’t make razor blades to offset the market buy-in. Apple would still be very differentiated from Amazon, but how much effort would Google put into developing Amazon’s platform if there is a proprietary layer with no mention of Google’s cloud services? I’d be willing to bet that Apple knows how to rake monopoly caliber profits from a tablet duopoly – especially considering that Amazon doesn’t make competitors to any of the other products in Apple’s suite. Their media and retail prowess is exactly what the other Android players lack, but in every other sense Amazon trails the pack.

  • Anonymous

    Goodbye intensedebate, hello Disqus?

  • Anonymous

    Goodbye intensedebate, hello Disqus?

    • Canucker

      I prefer IntenseDebate ;-( But Disqus allows searching of comments.

  • http://www.BarnesFamily.com/ davebarnes

    Me love Disqus.
    Me love Horace’s analyses.

  • pvt_zim

    InteseDebate disrupted!

    Things certainly move fast in the internet age. You only tweeted you were looking for a new comment system a couple of days ago.

    Are the previous comments making their way here?

  • Anonymous

    The problem with disqus is it’s not actually very good for discussions. Posts move around based on their number of likes so it can be hard to be sure that you’ve actually read everything in a particular thread.

    • Steko

      Maybe sort by more recent/oldest?

      • Anonymous

        O-O

        I never spotted that!

        But it’s not just me. I’ve noticed on most sites that use Discus people prefer to comment to the most liked post on a thread rather than post fresh – even if their post isn’t relevant – because by doing so they’ll get read.

        Oh and after about 10 levels of replying the discussion becomes about 5 characters wide :)

      • Anonymous

        But you can edit!

    • pvt_zim

      Try selecting ‘Oldest first’ or ‘Newest first’ in the drop down menu below the comment box. Seems to work for me.

    • Anonymous

      It’s a lot better than IntenseDebate, where comments are hidden in nested threads and you have no idea what is newly posted.

  • Rfalbo1

    “This is the classic razor/razor-blade business model.”

    Talk about stupid!… That ” Classic Razor/Blade” business model is somebody’s vivid imagination, and this guy fell for it because he’s too lazy to check it. It’s an urban legend that Gillette gave away their razors to sell their blades, but some simple fact checking would show that Gillette’s razors were actually sold at a premium compared to other razors. What sold Gillette’s razors was a reputation for QUALITY, period.

    • Steko

      Horace is not crediting Gillette and the model is widely called the razor and blades model and was used by Gillette’s competitors:

      http://en.wikipedia.org/wiki/Freebie_marketing

    • http://www.asymco.com Horace Dediu

      Who mentioned Gillette?

  • http://www.informationworkshop.org Mark Hernandez

    Such a sharp contrast between reasoned analysis (asymco), and a quickly written article with a linkbait title (Forbes).

  • http://pulse.yahoo.com/_UAOOH5UOUZLGBQWLVP7OYOL35Q DavidT

    So on this basis, the iPad and other tablets pass vulnerability tests with flying colors. The product is woefully inadequate for mainstream computing.

    I am not sure what “mainstream computing” means. If it includes “business productivity” computing the iPad and other tablets are insufficient. However, they (meaning the iPad) Seem to be more than sufficient for any personal computing needs, based on rapidly increasing sales worldwide. They even seem to be very capable in handling a large and growing business content “consumption”. Together those two make a very large market worldwide.

    I am typing this on an iPad to avoid booting up my laptop (PC with Windows).

    • Anonymous

      I think he means that there is still headroom for Apple to make iPad 3 significantly better than iPad 2 and raise the bar for the whole market. iPad does not have Retina yet, it does not have 4G, it does not have 1 gigabyte of RAM yet, it does not have a 64-bit chip. Retina on iPad would change the way many people look at tablets. Even diehard paper pushers would admit they times have changed.

      As bad as that may make iPad sound, a Windows PC is worse. Although the user may not need a faster Intel chip, they do not have good sleep/wake, they have viruses, they have terrible ease of use. That is why the Intel Mac was able to take the whole Windows PC high end and why iPad is taking the Windows PC low end. There is still lots of room to improve the Windows PC, but Microsoft is not doing it. Similarly, Motorola could ship a better-iPad-than-iPad but they are not doing it either.

      • Anonymous

        “Motorola could ship a better-iPad-than-iPad but they are not doing it”

        I doubt they could. Apart from all the attention to detail on the hardware side they lack the economy of scale of shipping millions of units/month. Besides they would need a decent OS, and Android isn’t one (for several reasons which I will explain if you like me to).

      • Anonymous

        “Motorola could ship a better-iPad-than-iPad but they are not doing it”

        I doubt they could. Apart from all the attention to detail on the hardware side they lack the economy of scale of shipping millions of units/month. Besides they would need a decent OS, and Android isn’t one (for several reasons which I will explain if you like me to).

    • http://profiles.google.com/marcosmalo Mark Mayer

      How are you defining “business productivity”? You mean being able to use MS Office? Because if you take a wider definition, many businesses are using the iPad in applications beyond showing training videos.

  • David Weintraub

    Is there a market for $99 tablets? No.

    People were scarfing down those TouchPads simply because of some sort of bargain hunter’s reflex. I know people who bought three or four simply because they were “only $99″ each. You ask them what they planned to do with them, and all you got was a shrug. All they know is that they were $500 and now only $99.

    People who exclusively drink the Apple Koolade and wouldn’t dare touch anything without The Logo on it bought TouchPads by the handfuls. It was pure instinct. If I had the chance, I would have bought them too even though my wife would have killed me for wasting money on something we don’t need.

    I bet many might end up on eBay for $200. I know a few people who think sooner or later there will be an Android version that they’ll be able to download on them. Others have told me they’re Christmas presents for their young nephews. In the end, it is a rather nice tablet and you can surf the web and do email. After all, it was a $500 tablet.

    A $99 tablet? Even if its a loss leader, it’d be worth no more than $250 and its build quality would simply be inferior to the iPad. People just wouldn’t buy it. $300? That’s not much cheaper than the iPad, and I bet the iPad would still be nicer.

    The thing is that Apple doesn’t do the razor/razor blade model. Apple makes money on the sale, on the software, and on the accessories. It’s why Apple has more cash than the combined market cap of Dell and HP combined.

    • Anonymous

      Apple doesn’t make that much on apps or content.

      Apps look like this:

      – 70% to developer
      – 29% to overhead
      – 1% to Apple

      Music looks like this:

      – 90% to publisher
      – 9% to overhead
      – 1% to Apple

      So unless Amazon is going to be selling apps and music for $20 a pop, there is not much money there for them to subsidize tablet hardware. The theme today is “users don’t want to pay for content,” not “users buy so much content you can give them free hardware.”

      • Anonymous

        eBooks look like

        67% to publisher
        30% to Apple/Amazon
        3% to overheads

        While I’d agree that Amazon can’t and won’t sell a tablet for under $200, and more likely for around the $250 mark – their digital retail margins aren’t as bad as you might think.

      • http://www.ewanleith.com/ Ewan Leith

        Where’s your credit card processing fee in that breakdown? It’s a lot higher than 3%…

      • Anonymous

        No, it isn’t, it’s actually around 2% for a big player like Apple but there’s a small fixed fee which inflates it for things like App and Music purchases, at least according to the analyses I’ve seen.

        eBooks are expensive enough that the fixed portion becomes small.

      • Anonymous

        eBooks look like

        67% to publisher
        30% to Apple/Amazon
        3% to overheads

        While I’d agree that Amazon can’t and won’t sell a tablet for under $200, and more likely for around the $250 mark – their digital retail margins aren’t as bad as you might think.

  • Talltrash

    Horace, I am 90% convinced. But what is barely adequate to one person is more than good enough to another.

    And where are the competitors disrupting Word, which is surely the most bloated and over specced product in history?

    • http://profiles.google.com/marcosmalo Mark Mayer

      “And where are the competitors disrupting Word, which is surely the most bloated and over specced product in history? ”

      Bit torrent. :P

    • http://twitter.com/adamphosho Adam Searle

      Google Docs is disrupting Word/Excel. It provides a minuscule percentage of the features of Word the swiss army knife, but importantly it provides say 80% of the features that many people actually require.

      There will always be users with greater needs who become the exception (Horace would be one), but for writing up an essay or sharing a document in the workplace, Google Docs can do the job and can actually be more convenient. Plus it’s free or low cost in the corporate world. I think that stands up well against the definition of “disruption”.

      • MacLuky

        Disrupting in this case would be better defined by “Did Google Docs hurt Microsoft Word?”. Judging by their annual report, I would say not disruptive enough.

        Though I agree with your points, Word is not feeling the pain

      • Anonymous

        Respectfully disagree. Open Office has been around much longer than Google Docs and closer in look and feel to Word and it could not displace Word.

        I think that Google Docs has zero chances of knocking off or even significantly affecting world.

      • Anonymous

        Open Office is great, and has a more robust feature set. However, it is a “generic” offering without a storefront to broadcast its existence to the world. Google Docs has the advantage of being tied to one of the world’s most visited websites. Think Android vs. WebOS – better doesn’t always win, and distribution matters.

        That being said, I think the primary driver for Word is the fact that it is in a suite with Excel and PowerPoint. Millions of business users know every quirk of Excel and are not interested in learning an alternative program. Accounting lives on spreadsheets. Most word processing doesn’t need a lot of bells and whistles for most users, but if they get the program they know for free when they buy Excel, they have no incentive to switch. The same goes with PowerPoint. MS bundles enough industry leading software together that most buyers don’t put up too much resistance.

      • Anonymous

        Open Office is great, and has a more robust feature set. However, it is a “generic” offering without a storefront to broadcast its existence to the world. Google Docs has the advantage of being tied to one of the world’s most visited websites. Think Android vs. WebOS – better doesn’t always win, and distribution matters.

        That being said, I think the primary driver for Word is the fact that it is in a suite with Excel and PowerPoint. Millions of business users know every quirk of Excel and are not interested in learning an alternative program. Accounting lives on spreadsheets. Most word processing doesn’t need a lot of bells and whistles for most users, but if they get the program they know for free when they buy Excel, they have no incentive to switch. The same goes with PowerPoint. MS bundles enough industry leading software together that most buyers don’t put up too much resistance.

    • Anonymous

      World Wide Web disrupted Word.

      • Anonymous

        Not really.

    • http://twitter.com/davidchu David Chu

      Just because a product is bloated and over specced doesn’t mean that it can be disrupted. In every market, there are companies/players who hold the power. In the word processor world, it’s Microsoft Office and the CIOs.

      • http://www.asymco.com Horace Dediu

        That’s right. Over-service is a necessary but not sufficient condition for disruption.

  • zmarc

    If Amazon can only discount the $140 Kindle by $25 for including lifetime advertising on the device, what makes anyone think they would be willing to take a $200+ bath on every color Kindle sold?

  • http://appleyngo.tumblr.com/ Appleyngo

    This is the diffusion of innovation theory. We can cut the process to three stage:”unique need”, “mainstream need” and “surplus need”. iPad now only pass the threshold of “unique need”(and already sell a lot),and the room for price war is still small.
    When the stage gets closer to “mainstream need” and “surplus need”, price war gets bitter. From iPhone to iPad, Apple always starts from “unique need” and try to keep “surplus need” away, so they can keep profit as first priority.

  • Anonymous

    If amazon indeed does release a subsidized android tablet (subsidized by content sales, and perhaps a payment from Microsoft to have bing search & maps only), then apple won’t be too worried…

    …Because it’s going to be a huge headache to every other android tablet manufacturer. Having a well funded competitor selling tablets at a loss is going to destroy any profits from android tablet sales.

  • Anonymous

    How can a $300 netbook be too cheap to be any good and a $99 iPad is just right? Makes no sense. How can the content subsidize hardware when the content cannot even support itself in most cases? Makes no sense.

    It’s weird to see these PC people who are so desperate to see their screwdriver shop culture replace Apple Stores that they are tracking every Jeff Bezos fart now that he is the latest generic tech champion sent to save us all from Apple.

    • Anonymous

      Aha, Amazon, the great white hope of the Android crowd and Applehaters.

  • http://twitter.com/davidchu David Chu

    In response to readers who argue that Pixar was not a low-cost innovation, Here is a review of Films released in 1995 and their budgets.

    Toy Story 1 had a budget of $30 million.
    Braveheart had a budget of $53 million.
    Pocahontas had a budget of $50 million.

    • Anonymous

      Yes, but then look at the budgets for all their subsequent movies. Toy Story wasn’t lowish budget because Pixar was a low cost disruptor. Toy Story was lowish budget because Pixar was a new and untried shop so they couldn’t get a big budget out of the gate.

      • Eric D.

        The Pixar movies have always earned their costs back handsomely, but the added value they’ve represented to Disney in the form of merchandising, TV spin-offs and theme park attractions has been much higher than their box office net.

        This would explain why larger budgets were approved, starting with Bug’s Life. From Disney, it seemed like a very smart bet. (At least until they got to Up, but that too exceeded all expectations.)

      • http://twitter.com/davidchu David Chu

        @Eduardo

        I don’t think it’s even an argument anymore in the animation world. The last traditional animation film made by Disney was made in 2004. There’s a reason the whole industry has moved to CGI. Even ‘Southpark’, which I could draw, switched completely to CGI a long time ago.

      • Woochifer

        Might want to read an updated wiki entry. “Princess and the Frog” came out in 2009, and “Winnie the Pooh” came out in 2011. Both of them traditional animated features.

  • Jason

    Isn’t a smart phone the low end disruptor to an ipad (if the ipad is a low end disruptor to a pc)?

    • Anonymous

      The iPad wasn’t a low end disruptor to the PC, the netbook was the low end disruptor. Smartphones aren’t any kind of disruptor to the tablet, primarily because tablet buyers mostly already have smartphones.

      The evidence is that Tablets and Smartphones are entirely complementary and do not compete, see for instance

      http://www.wired.com/gadgetlab/tag/netbooks/

  • Jason

    Isn’t a smart phone the low end disruptor to an ipad (if the ipad is a low end disruptor to a pc)?

  • Anonymous

    After reading the thought provoking article and comments, some observations:

    • for me, iPad has almost completely replaced the laptop because most of the things I use the laptop for can be done with an iPad. I certainly don’t do CAD or editing movies on my laptop, anyway; I don’t think most of the mainstream consumers don’t, either.

    • going forward, as the iPad evolves into an untethered device, the use of another PC will even be less. iCloud will make that happen, and it will also evolve to add more functionality.

    • I believe that that iPod Touch will be discontinued in it’s present form, within a year. The future iPod could have a 6″, or so, retina display. With a price of, say, $199, this will compete with the likes of Kindle, but with extra functionality and better screen. It will be like a color Kindle plus.

    • I also believe that the evolution of the iPad will mirror that of the iPod. There could be another model with the retina screen size of 8.5″ X 11″, or thereabouts, to mimic the size of the US letter/A4. If the wieght of this is the same or less than the current iPad 2, it will be a good seller; it won’t be more cumbersome to carry an 11″ tablet than a 10″ one.

    • IMO, this is the ‘mobile’ line-up I see from Apple in the near future:
    – an 8GB iPhone with a 3.5″ regular screen for $99
    – a 16/32 GB iPhone with a 4″ retina display for $499/$599
    – a 16/32 GB iPod Touch with a 6″ retina display, w/ Wi-Fi +/- 3/4G for $199/$299
    – a 16/32 GB iPad with a 9.7″ retina display, w/ Wi-Fi +/- 3/4G for $499/$699
    – a 16/32GB iPad with a 11″ retina display, w/ Wi-Fi +/- 3/4G for $599/$799
    – a 64/128 GB, 4″ RD iPod Touch for $299/$399

    • why do I think so:
    – with the iCloud, there is no need for higher memory, hence no 64GB models; also money saver.
    – there has to be a lower end iPhone that is more affordable. It could be just be 3G to be sold in BRIC countries.
    – consumers who can’t afford an iPad would buy an 6″ iPod Touch, as the iPad evolves into having more laptop functionality. Apple will not call anything with a screen size less than 9.7″ an iPad.
    – the 4″ iPod Touch is for people who’d want an iPod to store more of their music locally. The HDD iPod Classic may be discontinued.

    This is a reason why I don’t see Amazon or any other company using another OS (eg Android) catching up to Apple, either in tablets or the cellphone arenas. I think these products will flood the market and won’t allow a competitor to thrive, just like the iPod did. As Apple takes on other carriers internationally, and Sprint/T-Mo in the US, the iPhone will be even harder to subdue.

    • Rj

      What on earth makes you think that Apple would do a 6″ tablet? Because all of the 7″ ones that failed were an inch too big? The iPod Touch is a significant product that provides an entry-point for many that don’t want/can’t afford a phone.

      I note two substantial benefits of the iPod Touch 1) that the biggest cost of an iPhone is not the device but the phone access. Many people do not want to concern themselves with any of that and so the cheaper iPod Touch fits their requirements. 2) it is smaller than an iPhone (thinner and substantially lighter) without the radios and extra battery required to drive them.

      The Touch may well go away but it seems likely that it would be replaced by a device that fulfills or exceeds those product requirements.

      • Anonymous

        Yes, the 7″ tablets failed to capture the market, but so did all the 10″ non-iPads. Size doesn’t matter, in this case.

        SJ said that 7″ tablets were too small. He also once said that the iPod would never have video, and that tablets were a non-viable product.

        If a 5″-6″ iDevice gets built by Apple, it would be a bigger iPod Touch, not a smaller iPad.

      • Anonymous

        it would be amazing if they actually did do 2 ipod touches meshed together so you could run your gmail app on one screen and a camera app on the other.

        Kindah like the kyocera or the sony p–except with ipod touches and iOS software magic.

    • Davel

      I think all the different form factors you mention will not work

      What makes the apple infrastructure work is that for all the changes, the hardware is relatively stable. Your vision kills that.

    • Davel

      I think all the different form factors you mention will not work

      What makes the apple infrastructure work is that for all the changes, the hardware is relatively stable. Your vision kills that.

    • Davel

      I think all the different form factors you mention will not work

      What makes the apple infrastructure work is that for all the changes, the hardware is relatively stable. Your vision kills that.

    • Davel

      I think all the different form factors you mention will not work

      What makes the apple infrastructure work is that for all the changes, the hardware is relatively stable. Your vision kills that.

  • Anonymous

    Interesting rumours via digitimes that iPad production numbers are continuing to ramp up. If they’re correct then Horace’s estimates are going to get exploded.

    http://www.digitimes.com/news/a20110831PD210.html

    Whatever the iPads long range future, this Christmas is going to be a blowout.

  • Davel

    Horace

    A few weeks ago you posted your numbers for Apple’s upcoming qtr. I have seen rumors that Apple will build. 20M tablets this qtr. Do these rumors of supplier shipments affect your projections?

    • http://www.asymco.com Horace Dediu

      There are always rumors. I am somewhat doubtful of that figure but if it’s correct there will need to be some significant re-thinking about what growth Apple can sustain. Anything above 100% is unprecedented for such a long period of time.

    • http://www.asymco.com Horace Dediu

      There are always rumors. I am somewhat doubtful of that figure but if it’s correct there will need to be some significant re-thinking about what growth Apple can sustain. Anything above 100% is unprecedented for such a long period of time.

  • Anonymous

    Well we have a bit more on the Amazon tablet.

    http://techcrunch.com/2011/09/02/amazon-kindle-tablet/

    • davel

      This is interesting. But if the article is true and Amazon is introducing their own platform, what do they get out of this? They cannot leverage the Android system because they forked it and all developers now have Yet Another Android Platform to support. So it would have to be html5 or specific to the small number of devices Amazon sells. Let us say that number is 5 million. Or say 2 million the first year if they are successful.

      Is that big enough for the investment? I don’t know.

      I would think they would have more success by making a truly good html5 system to do the things the article says. As well as Android and Apple apps for people who want it.

      • http://www.asymco.com Horace Dediu

        You’re assuming Amazon wants to build a platform. I don’t. I think they want to sell stuff from their store.

      • http://twitter.com/ankleskater Ankle Skater

        What do you mean by Amazon not wanting to sell stuff from their store? Surely they will want to sell books, music and videos if not more?

        I’d be interested in seeing how much of a walled garden the Amazon Android tablet turns out to be. Will they make it hard, for example, for people to purchase books and music from Google, stream video from Netflix, etc.?

      • http://www.asymco.com Horace Dediu

        Perhaps you mis-read my comment.

    • http://www.asymco.com Horace Dediu

      It all sounds exactly what would be expected. At least what I expected, so I’m inclined to believe it.

    • http://www.asymco.com Horace Dediu

      It all sounds exactly what would be expected. At least what I expected, so I’m inclined to believe it.

  • Anonymous

    I’m far more interested in the effect of Eben Moglen’s FreedomBox or whatever it will be called and which will be out in a year, on the smartphone market. And there will be one. He’s considered a visionary.

    Moglen gave his first speech about it in February 2010 (the Q&A, available via google search gives the tech aspects), and it electrified open source developers at the Internet Society in NYC. A a result, Moglen took a sabbatical to travel the world to talk to developers on other continents.
    http://freedomboxfndn.mirocommunity.org/video/4/freedom-in-the-cloud.

    Why I consider this important is that it addresses the social aspect of our digital lives that technology so far has neglected, and that must be addressed if there is to be mature smartphone adoption. I can tell you for a fact that Siemens has jumped on this.

    The nice thing about listening to a Moglen talk is that he is as entertaining and informative as he is intelligent.

  • http://deviceconvergence.wordpress.com Nalini Kumar Muppala

    Excellent illustration of disruption. Thanks.

    “So on this basis, the iPad *and other* tablets pass vulnerability tests with flying colors. The product is woefully inadequate for mainstream computing.”

    Can we interpret this as follows? Tablets are still improving and thus not vulnerable for disruption. Since we are still in the improving stages, modular approach is at a disadvantage to integrated model. To date, the best integrated model tablet is the iPad. Hence the vote of confidence in iPad.

    • http://www.asymco.com Horace Dediu

      Yes, all tablets are inadequate today. The advantage Apple has however is that, being integrated, they can iterate more quickly and improve more quickly in response to market or technology signals. That means they will be more competitive and will probably capture a lion’s share of profits.

      Basically, the slope of their trajectory will be steeper. They will get into the sweet spot of meeting user needs more quickly and be there alone for a longer period of time.

      • Anonymous

        While I happen to agree that Apple’s unique status as an integrated hardware/software shop gives them an advantage I think it’s important to consider the alternative sources of Apple’s advantage in mobile,

        Apple made some decisions early on in development of iOS which resulted in superior performance to Android on equivalent hardware – however those advantages aren’t set in stone. Increasing hardware performance will diminish the advantages, and Google may choose to re-engineer portions of Android to provide superior performance.

        So while we can expect Apple to retain an advantage over other OEMs the advantage may be smaller than we are currently seeing.

  • http://www.eliainsider.com Elia Freedman

    I am a little slow to comment but wanted to say that the iPad is a disruptor of the PC (of which the Mac is one) and that you can’t displace a disruptor with another disruptor. You can outcompete it but you can’t displace it… yet. The Amazon Kindle is a disruptor as well (the classic and the new Android-based one) but won’t “disrupt” the iPad. Instead it will be employed for it’s own purposes, which will continue to disrupt the PC.

    • Anonymous

      Sure you can disrupt a disruptor. Feature-phones threated to disrupt the iPod and were disrupted by smartphones in their turn, the iPad has disrupted the Kindle classic which forced Amazon to develop the new Kindle tablet.

      It’s rare for a new disruptive entant to itself be disrupted, but not impossible.

      • http://www.eliainsider.com Elia Freedman

        I would be happy to concede that you are right but neither of your examples work. At some point disruptors are no longer disruptors, they are markets in their own right. By 2007-8 it would be hard to say that the iPod was a disruptor any longer. It was the standard norm by which we listened to music on the go. The tape player was long ago disrupted and pretty much gone from the scene by then. Feature phones didn’t disrupt the iPod any better than the Palm did (which offered a bundled MP3 player dating back to 2003). Therefore the iPhone didn’t disrupt the feature phone as an MP3 player at all.

        As for the Kindle… really? The device is still selling like hotcakes and many people I know own and use both an iPad and a Kindle. The Kindle has not been disrupted by anything so far and if anything is still in the process of disrupting the physical book. The Kindle “Tablet”, for lack of a better name, may compete against itself and may compete against the iPad, but it is not a disruptor in and of itself.

        Lots of products can try to be disruptors. Few succeed. And frankly you can only truly see a disruptor in the rear view mirror when sales of the disrupted product begin to go down or the disrupted product morphs to focus on other, upstream revenue opportunities.

      • Anonymous

        The kindle certainly has been disrupted by tablets, more so by the Nook color than the iPad, but tablets nevertheless.

        The iPod was still certainly disruptive in 2007 – see for instance

        http://arstechnica.com/tech-policy/news/2007/04/drm-lock-ins-and-piracy-all-red-herrings-for-a-music-industry-in-trouble.ars

        As of 2007 digital music was still not dominant, in fact it still isn’t, The idea that the iPod was completely mainstream at that point is false, when digital music is still disruptive to this day.

  • Pingback: CocoaChina移动观察 - iPad需要担心低端产品的竞争吗?()

  • http://michaelkdawson.com/ TrendRida

    Some of you may enjoy a new post that I just wrote – Does Amazon Have an iPad Killer Up Its Sleeve? http://stks.co/5aE

  • Anonymous

    I always thought it was because the margins were “razor-thin”. Thanks for clearing that up!

  • Anonymous

    Single sign-on is nice, though. A lot of my favorite sites use Disqus these days.

  • Chandra2

    The innovation disruption theory is a descriptive theory and not a prescriptive theory. As Horace said, it is necessary but sufficient. The thing about why Word was not disrupted ( in the corp world mainly ) is because of the network effect or market effect. People are afraid that if they switch to something else, they would not be able to read a document sent by someone else. ( not that different from why it is hard to disrupt eBay – supplier go there because consumers are there, consumer go there because supplier are there ).

    If you do not want low end disruption, figure out a way to get that network/market effect so they system itself will protect you from disruption for a while

  • http://usb3gvn.com USB 3G

    It is very interesting. Please give me more information. I love it, Thanks again. 

  • http://www.sslmatrix.com/ Cheap SSL Certificate

    I agree with some comments above. Nice article