The strategic implications of iPad

January 28, 2010

Plenty of people are ooh-ing and aah-ing about the features of Apple’s new tablet, the iPad. A good summary is here, and a rundown of the minuses (that I pretty much agree with) is here (all via Gizmodo, including the picture above this post).

That’s all fine, but I’m more interested in the business strategy implications of the iPad (other than “it will kill netbooks!” “it will kill the Kindle!”). Here are the things that I find fascinating about what the iPad announcement tells us about Apple’s strategy:

  • Apple makes its own CPUs. This is huge! I can’t believe I’m the only one who is fixated on this. We all know Apple acquired semiconductor company PA Semi back in 2008. Everyone assumed that they would use them to design auxiliary power-saving chips for the iPhone, iPod Touch and other mobile devices. But Apple just came out with its own central processor. This is, to the best of my knowledge, the first time Apple has built its own CPU for a device, going way back to the original Mac’s Motorola 68000 (a stalwart of the history of computing!) It is also huge, of course, for Intel. Apple was sort of backed into choosing Intel to provide its CPUs as the G4 architecture kept sliding behind the PC’s x86 architecture. But Jobs knew all too well that couldn’t last. After all, Intel is exactly the same kind of company as Apple: big, secretive, extracting fat margins from its should-be-commodity products through superior engineering and savvy marketing, and most of all, never shy at playing rough. I’m pretty sure Steve Jobs stayed awake at night more than once at the thought of depending on Intel for the core of his products. Now that’s gone. Intel will still power Macs for the foreseeable future, but now Jobs has a whole new negotiating position with them. And of course, it begs the question: while Intel will probably always have a lead in high end processors, how long until Dell and HP buy small semiconductor manufacturers and do the same as Apple for their low power devices? This is potentially¬†a seismic shift in how the personal computing industry functions.
  • Apple is now officially a media company. iTunes! Apps! Newspapers! Books! Movies! The original strategy with the iTunes Music Store was not to make money from it, but to use it as a “killer app” for the iPod, where the margins are, and also, of course, for lock-in. In fact, Apple has always been a hardware company using software to sell hardware. Apple makes very little to no money on software and cloud apps such as media stores. Is this changing? We all know how Apple at first rejected putting third-party apps on the iPhone and now is embracing the App Store. On the App Store, like on the iTunes store, Apple at first took a 30% cut expecting only to cover the cost of managing the store, but it is turning out that it is a huge business in its own right.¬†Is Apple shifting to a strategy to making money on content delivery? Which leads us to…
  • The iPad is CHEAP. Jobs famously said that Apple didn’t know how to make a piece of consumer electronics under $500 that isn’t a “piece of junk,” and when analysts called Apple’s strategy into question (remember those times? It was a looooong time ago.) he called Apple’s strategy the “BMW strategy”: own the high end through superior engineering and marketing, and make money through fat margins, not big marketshare. The opposite of the Dell strategy, which is why Michael Dell and Steve Jobs openly despise each other, despite everything they have in common: they come at their markets through radically opposite points of view. The iPod was an outlier in that it was both as expensive as a BMW and as widespread as a Toyota, but overall, that was still Apple’s strategy. And now the iPad starts at $499. I’m pretty sure Apple gets fat margins on the upper-end models (there’s not much extra in there to justify the extra hundred dollars), but its margin is probably razor thin at the $499 price point, which is probably going to be the most popular. This is a huge gamble for Apple. First of all, because the iPad could cannibalize its other products where it gets fatter margins, making Apple a victim of its own success. Second of all, because this is a whole new strategy: going for dominance of a new segment instead of just the high end. In fact, I suspect (no way to be sure yet) it might herald Apple turning its strategy on its head: instead of using software as a “loss leader” to sell hardware, using hardware as a “loss leader” for selling digital MEDIA. Again, there’s no way to be sure yet that that’s what Apple is doing, but if this is it, it represents a huge shift in Apple’s strategy, its business and its culture.

Of course, I don’t have to say that if this is Apple’s strategy, and Apple succeeds, this would be bad for open standards and open media delivery. There’s nothing Apple loves more than locked down systems, and you can bet all that media Apple delivers is going to be chock-full of DRM. After all, it’s also the ultimate consumer lock-in. Once you’ve bought all those movies and TV shows on your iPad, you’re going to want to watch them on a big screen, and for that you’re going to have to buy one of those big screen iMacs.

These are interesting times indeed.

(I will now let you return to your originally scheduled iPad coverage: ohmigod it’s so pretty! It doesn’t multitask, Steve Jobs you killed my dreams!)

About these ads

One Response to “The strategic implications of iPad”


  1. E-books are a tough sell for me, but DRM is out of the question.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

%d bloggers like this: