Want to Beat iPad? Hire a Psychologist

When unveiled in 2010, Apple didn’t know why iPad would be a major hit.* After spending most of the keynote explaining some of iPad’s basic features, such as email, reading books, and surfing the web, Apple left the fundamental question of why iPad would become popular to the marketplace to answer.  

One year, and 19.5 million iPads, later, the marketplace has spoken. While users have a variety of reasons for liking iPad, I attribute its success primarily to its ability to transfer innovation to the user. Apple’s curated iOS ecosystem allows iPad to bring app innovation, and functionality, into users’ lives, all the while sustaining a satisfaction level that is unmatched in Silicon Valley. When selling technology to consumers, initial satisfaction is good, but being able to deliver continued satisfaction and enjoyment is even better.  

When putting iPad in this context, it’s easier to see the uphill battle facing competitors. The competition is having a hard time beating iPad because they don’t understand why people are actually buying iPad. To beat iPad, you can’t look at it as some piece of hardware that runs apps; you can’t look at it as “an iPad”, but instead as “iPad”. You have to understand the emotional connection between iPad and its user, which a psychologist could analyze at a steep price.  A cheaper option to see the connection between iPad and its user is to walk into an Apple store and hover around the iPad table. After a minute or two, you will see the connection when looking at people’s faces.

Competitors need to aim for users’ hearts and minds and not assume that consumers are buying iPads just because they have $499 lying around the house.  I have little confidence that competitors can successfully appeal to consumers in the same way that Apple does. Instead, competitors have two options for fighting iPad: low price commoditization with little emotional appeal, or reliance on innovation to beat Apple at its own game.

1) From a financial perspective, removing the emotion out of a product does not bode well as competition will lead to hardware commoditization and the ensuing margin collapse. Profits and brand power will quickly evaporate. Nevertheless, competitors need to convince users that some level of satisfaction can be received from a tablet form factor at a much lower cost than iPad. Apple understands this alternative strategy (some say due to its PC war history) and is relying on its massive $66 billion cash position to secure device components at prices that help lower iPad’s cost to a price point that is very difficult for the competition to slide under, while at the same time maintaining attractive margins. If you are curious what the tablet market would look like if iPad competitors choose the route of hardware commoditization and low cost, instead of appealing to consumer’s emotion, look no further than the MP3 player market, where Apple’s iPod and iTunes ecosystem maintains 70% market and emotion share.

2) You can only rely on apps and services to such a extent before poor financials, low product margins, and a lack of cash become too much to bear and competitors exit the market. If low-priced commoditization sounds unappealing, a better strategy for competing against iPad is to innovate and come up with something completely different. Once this new product is developed, control the emotional connection to your consumer and strive for increasing functionality and user satisfaction. Let iPad have its user base, while your product entice others with unique features and attributes. Try to beat Apple at its own game.

One year, and 19.5 million iPads, later, the marketplace has spoken, but competitors have spent more time talking instead of listening and watching. 

*I didn’t write “if iPad would be a major hit”, but instead, “why iPad would be a major hit”. Apple has a history of releasing major products only after it knows it is worthy of becoming a hit.

iOS App Innovation and iPad 2 Design Lead to Magic

After my attempt to pick up iPad 2 on opening day failed miserably, I had to settle for ordering one online and waiting four weeks. On Wednesday, my wait ended. My initial iPad 2 thoughts focus on two themes; app innovation and iPad design. 

After connecting iPad to iTunes (using the iOS umbilical chord) and running through the obligatory setup process, I was ready to take my iPad 2 for a spin. My first stop; the app store.  Instead of searching for a specific app, I found myself scrolling through the Featured and Top Charts lists. After one hour, I had installed 15 apps, 14 of which were free*. 

Apps. Apps. Apps. Without apps, iPad 2 would feel empty. I’m intrigued by the ongoing debate as to how to judge an application ecosystem’s health and popularity. Does it mean anything if Android reports more apps than iOS? Should I look at the number of app developers, or the growth rate of application submissions? Can I go by how quick a developers conference sells out as some indication of ecosystem success?

The most critical aspect of an app ecosystem (iOS, Android, HP webOS, Windows Phone 7) is app innovation.  Every time I check the Featured app list, I want to see new apps. When I check the Top Charts list, I want to see new apps.  I want to see strong app circulation.  This type of app innovation stands at odds against those who argue as long as an app platform has the 10-15 apps that I use most often, then the platform is healthy and I should be happy. I strongly believe this type of settling for the bare minimal will lead to stagnant app buyers that become disenfranchised with routinely searching and paying for apps. 

With 15 apps downloaded and my iPad 2 in hand, I sat on my couch and it wasn’t long before I lost track of time. 

After a few minutes of using iPad 2, I found myself forgetting that I was using iPad 2. My entire thought process was given to the app that I was using.  While iPad looks and feels amazing, the iPad dissolves away when in use, exactly how Apple planned it. Remove the intermediary and let users interact directly with innovation.  I don’t care what’s inside or isn’t inside iPad 2, as long as iPad 2 has the ability to run the highest quality apps possible.  iPad 2 meets this goal. When I see iPad competitors spend precious commercial space discussing product specifications, similar to the laptop wars of the early 2000s, I can only laugh.  

Random bytes:  Although iPad 2’s Safari is adequate for web surfing, I’m having a much better experience using apps to access website content.  I always think back to a Wired article published a few months back, titled “The Web is Dead. Long Live the Internet”. While the author was somewhat off with the concept of “The Web” , I agree with some of his general ideas; primarily that Apps are changing the way we use the Web. I find myself turning to apps instead of surfing the Web through a search engine. 

Drawbacks: Overall, I did find it somewhat hard to type on iPad 2.  The onscreen keyboard is not wide enough for normal typing, even with iPad 2 turned horizontally on its side.  I also found having the onscreen keyboard displayed horizontally was subpar because of the amount of screen real estate that it took up. I’ve been finding myself using one finger to type (similar to the iPhone) and this can make certain tasks difficult.

I also have a number of questions on transporting iPad 2 safely. Should I put iPad 2 in a backpack, briefcase, or carry it in hand?  I don’t have a smart cover (yet), but what about the back of the iPad and possible scratches or scuffs?  I am leaning towards buying some type of pouch to put it in (which then can go in another bag), but it’s the first time that I actually felt the need to buy some type of protection for an iOS device, which I’m not thrilled about. I would hate to cover something up that was meant to be seen.

Overall, my iPad 2 has exceeded my lofty expectations.  Interestingly, I am finding specific and distinct uses for my three primary Apple products (Macbook - typing, iPhone 3GS - continuous communication,  iPad 2 - apps and entertainment).  I believe the iOS ecosystem has reached an inflection point where app innovation now has enough momentum to self-sustain itself (given continuous product innovation from Cupertino). In the coming weeks, I will lay out my argument for why I think the iOS ecosystem is in a solid position compared to other mobile platforms and how app innovation will ultimately decide the winners and losers in this ongoing technology revolution.  Stay tuned. 

*I am still hesitant to pay for applications without knowing how often I will utilize the app. As I have said for months, a better app store with the ability to preview and test drive paid apps would be beneficial. 

iPad's Actual Market Share

Ever since Steve Jobs unveiled the iPad 2, people have busy trying to compare his statements to the truth, especially this one: 

"Many have said (iPad) is the most successful consumer product ever launched. Over 90% market share and our competitors were flummoxed."

Where was Steve getting this 90% market share data point? Strategy Analytics showed iPad’s market share at 75% in 4Q10 and falling fast. 

The thing about Steve Jobs is that he rarely outright lies, instead opting to look at data in a way that he thinks makes most sense and which contains some shred of validity.  I don’t think Steve was far off from the truth saying iPad had 90% market share. Using conservative figures and assumptions, I calculate iPad’s tablet market share at 90% in 4Q10, and nearly 95% for 2010. 

However, in coming quarters, iPad’s market share will fall, but not for the reasons you might think.  

The main problem with market share data is that there is no easy way of measuring how many tablets are purchased by consumers. Instead, market research firms rely on company figures (i.e. Apple earnings reports, Samsung press releases) and other estimates to reach unit numbers that are better described as “shipped” rather than “sold”.   There is nothing wrong with this procedure as long as it is clearly labeled and, more importantly, the accompanying attention-grabbing headlines indicate this terminology. Instead, bloggers and reporters jump to conclusions that are often misguided and misleading. 

So why is it okay that companies report units shipped as units sold? It all comes down to accounting. 

Companies need to determine inventory and cost of good sold figures in order to calculate earnings. Sounds simple enough.  Diving deeper into purchasing contracts would show the more intricate interactions between a buyer and seller.  Without jumping into the accounting bunny hole, let’s look at Apple’s most recent 10-K:

"(Apple) recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. For most of (Apple)’s product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, (Apple) defers revenue until the customer receives the product because (Apple) legally retains a portion of the risk of loss on these sales during transit.”

An iPad on a freight plane headed to a Walmart warehouse is no longer counted as an iPad in Apple’s inventory, instead it is counted as an iPad in Walmart’s inventory. Apple is able to recognize that iPad as sold and recognize the accompanying revenue (and profit). 

So how should one account for market share data with this shipped/sold methodology in mind? I support the idea that proper market share data should make an attempt of calculating how many units have been sold to consumers.  There is no exact science to this, and to a certain degree, even Apple and Samsung may not know day to day how much of its product is actually sold (although this process is becoming more efficient thanks to advancements such as Walmart’s lean inventory practices which notifies Apple soon after you buy iPad). Given the tablet market’s young age and small sales figures, we can reach market share according to units sold to consumers with a large degree of confidence. 

Let’s start with the most recent market share data by Strategy Analytics published on January 31, 2011: 

Global Tablet 4Q10 OS Shipments:

iPad: 7.3 million

Android: 2.1 million

Others: 0.3 million

According to these figures, iPad’s market share fell to 75% in 4Q10. Let us dive deeper into these numbers. 

1) Since Strategy Analytics is using shipped units, I want to turn these numbers into units sold.  To do this, I need to estimate the number of tablets that are currently in a company’s distribution channel, (the location between Apple’s factories and your living room). Apple’s iPad distribution channel is easy to calculate, since Apple’s CFO Peter Oppenheimer gave it to us on Apple’s most recent earnings call. iPad channel inventory was up 525,000 iPads during the quarter with a total of 4-6 weeks of sales in inventory (roughly 2.5-3 million iPads). Apple had already filled its distribution channel two quarters ago and the 525,000 additional iPads were put in the channel to fill additional points of sale.  iPad was available in 46 countries with an additional 15 countries selling iPad in the beginning of 2011.  To recap, Apple shipped 7.3 million iPads in the quarter, which includes stuffing 525,000 iPads into the already filled channel, leaving 6.7 million iPads actually sold to consumers (iPads shipped - iPads put in channel inventory = iPads sold). To be ultra conservative, I will assume they had to fill their channel more than they said, leaving approximately 6.4 million iPads bought by consumers during the most recent quarter. 

2) Let us do the same calculation for Android sales: 2.1 million android tablets were shipped during 4Q10. How big is that distribution channel? Taking a look around the marketplace, there really wasn’t much in the way of Android tablets besides Samsung’s Galaxy Tab and we know from reports that the Galaxy Tab was available in 94 countries and 200 different wireless carriers. We also know that the Galaxy Tab was introduced close to the end of 3Q10, and market share data shows only 0.1 million android tablets were shipped during 3Q10. Ladies and gentlemen, this is called a channel stuff.  Android’s 2.1 million shipped figure for 4Q10 was primarily Samsung filling its extensive channel (which I estimate to be at least 1.5 million Galaxy Tabs). Available in twice as many countries as Apple, I assume that the channel is nearly 50% the size of iPad’s channel (for the sake of being conservative). Samsung’s Galaxy Tab channel has been relatively small in the U.S., but in Asia and Europe, the Galaxy Tab’s retail reach has been much more extensive. Backing out the channel inventory, leaves me with around 0.6 million Android tablets sold during 4Q10.

3) Tablets marked as “Other” I will largely ignore since that is a non-factor considering a typical freight plane will hold a few thousand tablets at a time. I consider the 0.3 million tablets as largely channel fill and random promotions, so I will include 0.1 million “other” tablets sold during 4Q10. 

Revised market share for tablets that were actually sold during 4Q10:

iPad:  6.4 million

Android: 0.6 million

Others:  0.1 million

Revised iPad market share in 4Q10: 90%.  For 2010, using the same procedure, I calculate that Apple sold approximately 12 million iPads, with Android selling 0.7 million tablets and 0.1 million “other” tablets sold to consumers, giving iPad approximately 95% market share for 2010.  Steve Jobs wasn’t far off with his 90% iPad market share statement.

With all of this shipped vs. sold terminology in mind, it is important to think about how this will impact iPad’s market share going forward. With tablets from RIMM and HP shipping sometime in the near future, and additional Android tablets like the Motorola Xoom, it is obvious that there will be more tablets shipped in 2011 than in 2010.  Running back of the envelope numbers: if Apple can ship 20 million iPads (conservative) in 2011, RIMM ships 3 million, HP ships 2 million, and Motorola ships 2 million, iPad’s market share is now down to 74% and falling fast. 

However, if we take a look at units sold, I am confident that iPad will be doing much better.  

It will be interesting to keep an eye on how actual sell-through turns out for non-iPads. The tricky part in this whole market share discussion is what happens to tablets that don’t sell?  Will price reductions beef up sales?  What if non-iPads are literally given away?  Does every non-iPad that gets manufactured eventually finds its way into the hands of a consumer? Why does all of this matter?  One word.  Developers.

A tablet stuck in a distribution channel or sitting on the shelve at Walmart will not lead to many sales of a developer’s application.  A stack of tablets given out for free because no one wanted to pay for it doesn’t exactly sound like prime ground to stake app development dollars, and we all know that software (and the accompanying third-party app ecosystem) will ultimately decide long-term tablet market share. 

Use caution when reading the dozens of upcoming tablet market share reports in 2011 or you will misunderstand what is actually happening in the marketplace.