Sunday, August 21, 2011

Why The Apple iPad Stands Alone

HP's recent announcement the company is extinguishing its webOS-based product lines and jettisoning its PC division highlight the ongoing transformation of the personal technology markets. Market share alone accomplishes nothing. Integrated product lines and content to support product sales mean everything in our fast-changing world. 
Although HP is currently the world's largest PC maker, HP doesn't own the operating system on which the company's consumer PC products run. Developing a strong content distribution system to support product sales for the mobile OS the company does own would have taken years and billions of dollars to accomplish. HP's global PC market share delivered no advantages in efforts to develop a market for handheld digital devices. Content sells devices. Without content and the means to sell and distribute content quickly and inexpensively, device sales will languish.

The Apple iPad now stands alone in the global market for tablets. The iPad is first and foremost an expansion of Apple's multi-device iOS product paradigm. Outside of the Apple iPad, a robust consumer market for tablet devices does not currently exist. At this time there isn't consumer demand for a tablet other than the iOS-based product Apple has released in tablet form. 

The Foundation of the iPad's Success
Underpinning the Apple iPad's success are the same factors underpinning the success of the iPhone and the iPod touch. Through the end of the June quarter, cumulative iOS-based product sales have reached 222 million units.  However, the more impressive statistic is the more than 225 million iTunes accounts backed by credit cards. The Apple iPad is building on the customer and content sales relationships the company began establishing in 2003 with the opening of the iTunes store. There isn't a competing product manufacturer that has a direct sales relationship with almost one-quarter billion customers with active accounts for content purchases. The chart below illustrates the Apple iPad's unit sales performance since the product's initial release. 

The Apple iPad's initial success wasn't primarily sourced in consumer demand for a tablet product. Apple's ability to sell 3.27 million iPads in the first quarter of release (FQ3 2010) was due to the gamut of content available through iTunes to support the device, the ability of consumers to share apps across multiple iOS devices and share content such as music and movies purchased for any iTunes-compatible product. The iPad's continuing success will be fueled in part by the rich content and the quality of the apps that continue to become available for Apple's iOS-based devices.

Additionally, Apple's growing network of retail stores allows the company to not only keep the retail margin on devices sold, the stores generate foot traffic to support the sales of all Apple products. Again, there isn't a competing product manufacturer with the depth and scope of direct customer relationships as Apple. The chart below illustrates the growth in Apple retail store sales since the debut of the original iPad. 
The iPhone And iPad Are Apple's Principal Products
In the most recent four-quarter period, the iPhone and iPad generated 60.98% of Apple's $100.322 billion in reported revenue. The iPad alone generated 16.23% of the revenue total. In the recent June quarter the iPad eclipsed the Mac in revenue performance due to faster than expected adoption of the iPad in the K-12 market. The array of educational content available for Apple devices wasn't crafted overnight. It's a continuation of an educational content delivery program that began soon after the first iPods were sold and continues today in initiatives such as iTunes U.
The Apple iPad isn't a PC replacement nor is it a PC in a tablet-sized box. The Apple iPad transcends the PC and is a manifestation of the post-PC era. The iPad was in development long before the iPhone came to market. Because of its long development history, the iPad is much more than an iPhone or iPod touch in a larger container. It's an expansion of a content delivery and device sales model that has its genesis in the first iPods released ten years ago. 
Success In The Tablet Market
Success in the tablet market for iPad competitors will be sourced in the content available and the ease of content delivery no matter how well competing devices might be designed. Matching the iPad's price will not yield the iPad's margins for competitors because Apple's retail stores deliver additional retail margin on iPads sold. 
HP's decision to extinguish its webOS product efforts signals success in selling tablets requires a commitment greater than acquiring and developing a mobile OS and placing a hardware device in the market. The question now is whether or not makers of Android-based tablets can do any better. 

Disclosure: The author is long Apple shares

Robert Paul Leitao