Oct 2015 – Naofumi Kagami

How Will iPad Sales Rebound?

With all the talk surrounding Apple’s new iPad Pro and its predicted assault into the corporate workplace, replacing legacy PCs, you would be forgiven for thinking that all is well in iPad/tablet land, and that sales are growing healthily.

Except that it’s not. iPad sales have been flat/declining since 2013 and up till the last earning report from Apple, there has been no sign that it has even hit the bottom.

Therefore, any analysis of what iPads future prospects are has to balance and ideally encompass two opposing trends. You need a holistic discussion.

The following are a few things that we might consider;

The majority of iPad use to date has not been at work. Usage data by hour-of-the-day clearly indicates that iPads are used during leisure hours, and that work hour usage is much less.
Smartphone hardware and software have improved to the point that a very large proportion of tasks can be performed on phones. It is questionable if there remains any common home computing task which definitely needs larger devices.
As far as I know, corporate deployment of iPads has mostly been limited to special tasks for which PCs are ill-suited. Tablets have not yet replaced PCs in corporates in any significant degree, and we haven’t even seen any clues that this is imminent. Common reasons are the lack of support for legacy systems and software (which includes MS-Office).
It has been commonly accepted that long replacement cycles are a major factor in the lack of growth in iPad sales. Well do you know what? Even the latest iOS 9 supports the iPad 2, introduced in March 2011. The only news coming out from Apple that might spark upgrades is the iPad Pro, but given its much increased price, we can safely assume that most current iPad owners will not upgrade their devices to the Pro.
The iPad Pro with the new Pencil and software from Adobe make a compelling case for a device that graphic professionals would love. But we also know that this is a small market. Adobe Creative Cloud, for example, is aiming for a total of 6 million subscribers by the end of 2015. In comparison, it’s likely that the iPad installed base is several hundreds of millions.

Considering the above points, the following is what I’m thinking;

Discussions about whether or not tablets will replace household PCs is totally irrelevant. The household PC market is probably shrinking rapidly, especially in usage hours, as people find that they can browse the web, download music, manage photos, reply to emails very comfortably from their smartphones. Discussing who will prevail in this market isn’t very forward thinking, and as time passes, the relevance of household PC replacements will diminish to the level of insignificance. It is questionable whether replacing household PCs will significantly contribute to increased iPad sales, even if it happened at a large scale.
Selling to creative professionals will not significantly affect iPad sales. The iPad Pro is a great device, but the Pencil will not lift iPad sales.
The iPad Pro is unlikely to mass accelerate the iPad replacement cycle.

It is blindingly apparent that what we have seen with the iPad Pro alone will not revive iPad sales. The answer will have to come from elsewhere. It will have to come from non-consumption of computing; i.e. the conversion of non-computing tasks into computing tasks.

Exhibit. 1: Diminishing role of PCs in household use.

StatCounter comparison US daily 20120816 20151001

This graph (from StatCounter) shows daily web usage by device type. The spikes in the data indicate weekend usage. In the blue line (desktop PCs), weekends show reduced usage. In the green (mobile/smartphone) and purple lines, weekends show increased usage. This shows how desktop PC usage skews to workdays and smartphone/tablet usage skews to weekends. Interestingly, as smartphone usage increases, desktop PC spikes get deeper. This suggests that mobile usage is taking away home PC usage, but not so much of work PC usage.

Google’s Response to Accidental Clicks

Google recently described on their blog, some of the ways that they have been trying to rectify the “accidental click” problem, which some 3rd party studies have estimated to amount to 50% of ad clicks.

This is obviously a welcome move from the advertisers which have ultimately pay for these accidental clicks, but it also raises the question of a) is this enough from the advertiser’s point of view, and b) how much will this impact Google’s revenues.

To understand this, we have to carefully look a the constraints that are carefully worded into this article.

This only applies to AdSense: This article carefully mentions that all remedies and conversion rate improvements apply to display ads only. This does not apply to AdWords ads, the ads that show up on Google search result pages. Now the vast majority of Google’s revenue comes from AdWords. Google’s AdSense business is much smaller and hardly growing in revenue. Therefore we can conclude that Google’s remedies only apply to a small portion of their overall business, and it is a business that is decreasing in importance.
AdSense text ads are not affected: AdSense is comprised of a image ads and text ads. It is unclear which of these is a larger business. However, since banner blindness is well documented and users have learnt to not click on anything that looks like a banner ad, it is possible that text ads actually attract the bulk of clicks for AdSense. This article again carefully makes it clear that the enhancements only apply to the image-containing banner ads.

It appears that Google has restricted the improvements for click quality to the segments of ads which will impact Google’s revenue the least. This is completely understandable given that Google, as any other company, wants to increase revenue and profit, but it is also important that the current efforts will only fix a minor segment of accidental clicks. This means that going forward, there will still remain a significant number of accidental clicks, and that Google may again be pressured by advertisers to reduce these in the not-too-distant future. Although not necessarily a likely possibility, it would be particularly damaging if Google was forced to modify its search ad format (AdWords) to prevent accidental clicks from users who did not recognise that the links were actually advertisements.

Thinking Of Xiaomi, And What Services Are Profitable

One common narrative is that the profits in tech are not in hardware nor even in software, but in services. The poster example for this trend is Xiaomi, a company that is supposedly subsidising the cost of its smartphones, and making it up with profits from services.

I have always had a problem with this logic. My problem resides in the fact that not all services, even the very successful ones, are profitable. Another problem is that the most profitable tech company in the world, Apple, is making its money, not because it has the best services in the world, but because it has the best devices (which are a combination of hardware, software and services). It doesn’t seem to be as simple as services = high profits, hardware = low profits.

In this light, I think it’s important to look at exactly what kind of services Xiaomi is offering. This Wall Street Journal article is a good place to start.

Mr. Lei expects big growth in services built around the smartphone ecosystem. Each day, Xiaomi’s 130 million users use their phones 115 times for a total of 4.5 hours on average, he said. The company has set up a marketplace for online commerce and services, including things as diverse as video, news, financial services, television sets, air purifiers and luggage. “We’re a huge content platform,” he said. “All our [traffic] numbers are astronomical.”

The services described here are all quite commonplace. There are many companies doing video and online commerce, and technically it is very straightforward to do. Online financial services are also provided by many companies, and there is little reason to believe that Xiaomi’s offerings are significantly better than average. The selling of branded television sets, air purifiers and luggage is really low-tech, and in many ways what we would consider a commodity. If these are the services that are profitable for Xiaomi, then we have to rethink what it means to be profitable in services.

It would seem that profitability in services is not directly tied to the innovation provided. At least Xiaomi doesn’t believe so. Instead, Xiaomi seems to be selling mediocre services and products to its loyal fan-base, and it appears to believe that this is how to make profits.

The way I see it is this;

Android smartphones are unprofitable because of hyper-competition. The promise of high-growth lures companies into this market, despite very low short-term profits. On the other hand, commodities like air purifiers. luggage, online financial services etc. have a proven business model that is at the very least, more profitable than smartphones, partially because competition is less fierce. Therefore, one business model is to gain the trust and loyalty of customers by selling good smartphones at cheap prices, to the extent that you become a lifestyle brand. Then sell mediocre but profitable lifestyle products with your branding to these customers.

In a nutshell, gain customer loyalty through high-tech, but earn profits from low-tech.

And “services” is the low-tech part. Which also means that it’s relatively easy to copy.

Update

Just to extend this argument and make it more interesting.

Imagine if Google decided that it needed another business model outside of advertising. Imagine if they adopted the Xiaomi model. What might we see?

I could imagine;

Google branded bicycles, apparel, furniture.
Google banking and insurance services.
Google virtual shopping malls.

Mind you, none of these need innovative tech inside them. Just do what everybody else is doing but leverage the power of your brand to earn higher-than-average margins.