Tag: iPad

iPad Turnaround on Track

In Apple’s latest earnings call for the 2017 October to December quarter, the iPad was reported to see an increase of 1% in Units and 6% in revenue year-on-year. Given that the quarter was for 13-weeks versus 14-weeks a year ago, the growth in units per week would be something line 8-9%.

This is very much in line with a prediction that I gave in 2-Aug 2017 in which I said that 2017Q3 (Jul-Sep) would show strong growth YoY (actual 11% growth in units), whereas 2017Q4 (Oct-Dec) would decelerate (8-9% growth in units). I attributed this to holiday sales being mainly driven by the “entertainment” segment, which is still declining, whereas the “productivity” segment is showing steady growth irrespective of seasonality. Here I would like to illustrate my point further.

I would like to use the excellent charts prepared by Macstories (shown below). Here we see the historic iPad unit sales in green, and we notice that the seasonal spike in Apple’s fiscal Q1 (Oct-Dec) is decreasing almost to the point where it is no longer noticeable. Instead of looking like the extremely seasonal traces for the iPhone or the iPod, the iPad is looking more like the smooth, non-seasonal line for the Mac. In fact, when we look at what drove the decline in iPad sales, it is mainly the Oct-Dec spike that was decreasing while the base sales were not suffering so much.

This clearly illustrates that the iPad is becoming more of a PC-like productivity device which is necessary for work or study (and hence purchased around the year whenever needed), rather than an iPod-like entertainment or iPhone-like social network/communication device the purchase of which can be held-back till the holidays. Going forward, we can expect the seasonal spike for iPad to almost totally diminish, and the unit sales trend to lose most of its seasonality.

Importantly, the iPad sales growth that we saw in 2017 came strong in the Apr-Jun and Jul-Sep quarters suggesting that the base sales – the “productivity” segment is gaining momentum. We can therefore make the following prediction for iPad sales in 2018.

  1. For the quarters from Jan to Sep 2018, we can expect strong double digit growth in units YoY similar to what we saw in mid-2017. This will be the base sales from the “productivity” segment. Like PCs, “productivity” also includes education and so we might start to see “back to school” surges in the Jul-Sep quarter like we see for Macs.
  2. For the Oct to Dec 2018 quarter, I expect YoY growth to be somewhat dampened but still close to 10%. At this point, even in the holiday season, very few people will be buying iPads for “entertainment”. “Entertainment”, that is watching movies/TV or playing games, is something that can be done comfortably on smartphones, and is not something that people will go and buy a tablet for.

All in all, I see the state of the iPad to be very healthy. Apple has been pushing the productivity of the iPad in recent years, and the market has been responding to this. Apple’s efforts into collaborating with enterprise-oriented partners like IBM, improving the multitasking and inter-app sharing of iOS, and just marketing in general, have borne fruit. Although many pundits dismiss the iPad as now just being flat in terms of growth, I see the current quarter as strong proof that we will see very good growth and excitement over the iPad in 2018.

Predictions For 2017: iPad Sales Growth

This is the second in my series of posts where I make predictions for 2017. The first one was about Autonomous Driving.

iPad sales growth

2016 was the year when we started to see revenue growth (but not unit growth) in the iPad. Many were quick to say that this was due to the introduction of the iPad Pro, but I think this misses the fundamental dynamic of what is happening in the tablet market. In fact, I have said in this blog multiple times, that most tech pundits have not understood the dynamic of the tablet market from the very beginning. The people who attribute revenue growth squarely on the iPad Pro inevitably expect a very slow growth going forward, since they do not see continuous growth drivers. My prediction is different in that I expect accelerated growth that will be in the high single digits.

Here I will illustrate my thesis and show why we should expect strong growth in 2017.

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The above chart shows my hypothesis for what has been happening in the iPad market from the beginning; why we saw a very strong introduction, followed by a decline, and then a plateau.

  1. First of all, I separate the iPad market into two distinct segments. The first is the “Entertainment” segment which includes gaming, video watching, etc. The second is “Productivity” which includes writing, drawing, video/audio production, etc.
  2. In the initial phase of the market, we saw a huge uptake of usage in the first “Entertainment” segment. Even though the iPad was a new category device, looking at its gaming and video capabilities, it was a clear and obvious replacement for mobile game consoles like the Play Station Portable and the Nintendo 3DS. It was also a simple replacement for secondary TV screens. Since consumers could easily see the benefits and how it would work, the initial adoption was very rapid. That is, there was no need for an early adopter phase where only a fraction of the population would understand the merits of the device.
  3. However, as smartphones gained processing power and larger screens, they also started to satisfy the “Entertainment” segment. Hence the later decline in sales for this segment which started to happen in 2013-14.
  4. All this while, the “Productivity” segment of the market was going through a regular adoption curve of new category products. That is in the first few years, only the brave early adopters used iPads for “Productivity”. However, the number of these users has slowly but steadily been rising. In many cases, this has been happening more in the corporate market than in consumer markets because frankly, “productivity” is more important for our work than for leisure. It is important to note that whereas larger screen smartphones are adequate for playing games and watching videos, it is really torture editing a spreadsheet on smartphones. The benefits of a larger screen tend to be more pronounces in the “productivity” segment.
  5. Therefore, looking at the sum of both segments, we will see something like the yellow curve where a period of decline will be followed by steady growth.

Although I have made the “productivity” segment to show linear growth in the above chart, in reality, it is more likely to be sigmoidal. Therefore, when the “productivity” segment gains steam, we are likely to see quite steeper growth.

From my thesis, I can predict the following;

  1. We will see strong growth of the iPad in 2017 onwards. 2017 will start slow, but growth will accelerate.
  2. Since growth will come from “productivity” segments, the seasonality of iPad sales will become less severe.
  3. We will continue to see strong sales coming from corporations, but sales to consumers may continue to be weak.

Since 2017 is still the early phase of “productivity” segment adoption, it might yet be a bit early to see a strong impact in 2017Q1 and Q2. However, I do expect 2017Q3 to show a significant effect. 2017Q4 will be less impressive due to the “entertainment” segment dominating during the holiday season.

Keyboards As Legacy Devices

One of the common arguments against the tablets as productivity devices, is that writing is an essential part of “content creation” and that long-form writing necessitates a keyboard.

I have strongly questioned the validity of both these assertions. I do not think that writing is an essential part of “content creation”, nor do I think that long-form writing needs a keyboard. Here I will focus on the second assertion and illustrate how the new generation might consider keyboards as legacy I/O.

Japanese students are faster with smartphones than with keyboards

A Japanese article in ITMedia tested how fast 16 Japanese students could enter text with smartphones and with PCs. The author found that many students could type up to 2x faster on smartphones, and that the fastest smartphone typer was faster than the fastest PC typer. They also found that the two students who were faster on a PC were using QWERTY keyboards on smartphone, instead of the flick input.

If we consider the comfortability of long-form text entry to be an essential part of a “content creation” device, then at least for the Japanese youth, smartphones are better than PCs.

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QWERTY is holding back Western languages

One might think that the above only applies to non-Western languages. However, I believe that we can also extend this argument to Western languages as well.

The issue is that Western language users still are using the inefficient and legacy QWERTY keyboard layout instead of something that has been designed for and optimised for smartphones (or even PCs for that matter). If Western users started to use a keyboard layout that was designed for smartphones, then maybe they wouldn’t need hacks like Swype to type faster. It is possible that what is holding tablet text entry behind is not the lack of a physical keyboard, but the lack of new ideas and the unwillingness to try a new input method.

Implications for the future

There is a possibility that the legacy of QWERTY keyboards is holding back innovation. The physical keyboards that Blackberry insisted on, prevented them from pioneering phones that had large touch-screen displays. The insistence on physical keyboards is probably a huge factor in keeping US schools from embracing the tablet form-factor (and is helping float the Chromebook market). If this continues, then it is very likely that innovation in the next wave of “content creation”, if it is to happen on tablets, will not come from QWERTY countries, but from non-Western language ones.

I see physical keyboards as legacy devices. They are slowing down innovation. Instead of discussing whether future “content creation” devices should have keyboards (like the 2-in-1 form factor), the real discussion should be how to create a better keyboard layout that is completely free of the century-old typewriter QWERTY legacy.

Appendix: About Flick Input

Flick input uses a keyboard like the one shown in the image below. There are 12 light grey keys that are used to enter characters. The Japanese phonetic writing system uses roughly 50 characters which is much more than the 12 grey keys. However, when you press one of the grey keys, you are presented with 5 different options. Flicking in the direction of any of these keys allows you to select one of these (no flicking selects the centre one). Therefore, from the 12 light grey keys, you can generate 12 x 6 = 60 different characters. Proficient users will memorise the flick direction, and will not need to wait for the options to appear on the screen. Instead, they will simply put their finger on any of the keys and immediately flick in the appropriate direction.

Since three Japanese characters contains about as much information as a single English word, you can see how efficient Flick input can be. Add the fact that the keys are much larger (fewer mistakes) and can comfortably be accessed with a single hand, and you can understand why Japanese youth are so fast with this.

Similar concepts are available for Western languages like MessagEase. One problem for Western languages may be that QWERTY is bad but not hurting enough to convince people to learn a new keyboard layout.

NewImage

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;

  1. 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.
  2. 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.
  3. 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).
  4. 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.
  5. 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;

  1. 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.
  2. 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.
  3. 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.

Chromebooks and iPads in U.S. Schools

A recent blog on the New York Times described how Chromebooks are gaining in the U.S. education market (K-12). I have wrote quite a lot about Chromebooks on this block, and this article tells us that progress has been made on the part of Google. Of course, the market that is described in this article is quite small with only 13.2 million units annually, in comparison to over 300 million PC units (excluding tablets) sold worldwide, and as far as I know, Chromebook’s success in K-12 education has not expanded to other markets (including international). Nonetheless, this is good news for Google.

The comments section is also very good, with some specific examples of why certain schools decided to purchase Chromebooks instead of iPads or Windows PCs.

My broad-view understanding is that Chromebooks are serving pre-existing needs that are mainly administrative by nature, and are best understood as sustaining or efficiency innovations. The blog post and the associated comments strengthen my view.

The real problem as I see, it is that there is a huge amount of potential in bringing technology to the classroom, but there is still too little investment in terms of hardware, software, curriculum and teaching skills. Sustaining and efficiency innovations won’t take us there. They don’t provide administration with good reasons to invest more; they only give us reasons to spend less. We need empowering innovations (such as which the iPad promises to bring) for that.

Data shown in this article

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Understanding Where Tablets Can Go From Here

Before iPad sales started to slow down in 2013, the vast majority of analysts were bullish on tablets, predicting the imminent replacement of mainstream computing (PCs) by tablets. I’ll just pick a few articles to illustrate my point;

  1. John Kirk on Techpinions, Jan. 2014: How The Tablet Made An Ass Of The PC
  2. Ben Bajarin on Techpinions, Jun. 2013: How the Tablet is Killing the PC
  3. Horace Dediu on Asymco, Dec. 2013: When will the migration from PCs be complete?
  4. Ben Thompson on Stratechery, Jan. 2014: WINDOWS 8 AND THE COST OF COMPLEXITY

Although the degree to which each analyst strongly suggested a glowing future for tablets varies, there was a very consistent theme that tablets were in the process of replacing PCs.

In 2014, declining iPad sales (and declining Android tablet sales shortly thereafter) proved that these analysts were completely wrong, or at the very least, overlooking a very important piece of the puzzle.

For the record, I was questioning the conventional wisdom that tablets were replacing PCs back in January and February of 2014, before most pundits noticed that iPad sales were flattening (1, 2, 3), so I think I had a pretty accurate sense that iPad growth wouldn’t be so easy. I even said in Jan 2014;

So what I sense is the possibility that tablets (as computing devices) may have hit a roadblock in adoption, and this is due to the potential market being actually much smaller than envisioned. Much smaller than the PC market.

Now that Ben Bajarin has become openly bearish(subscription required) on tablets, I think we should take a step back and look at the market from a birds-eye perspective. We should question whether we really understand what is happening.

Understanding the complexity of the tablet PC market.

The tablet market is extremely complex. PCs were first hired mainly to do increase office productivity, and later to connect to the Internet. Smartphones, despite being very complex in what they can accomplish, are essentially uniform in the value that they provide to their users. However tablets are very different. They can be very different things to different people. Let me elaborate.

Jobs where the iPad is already a good fit

  1. A corporate executive’s/sales rep’s communication device: By this, I mean a device that is hired to handle simple emails and messaging, leaning on the reading aspect more than writing. You could also add a bit of presentations and accessing corporate web-based dashboards.
  2. A home entertainment device: Current tablets allow users to view a variety of video content and also provide a wide range of video.
  3. A home Internet device: Current tablets, especially the iPad is used for a variety of common consumer Internet tasks like viewing websites, posting on Facebook, replying to messages, etc.

These are the jobs which already existed, and in which the iPad could already be considered mature. Because the value proposition was clear and obvious, these are the jobs which drove the initial tremendous ramp up of iPad sales. In particular, we know that the majority of iPad usage happened in the home and not at work. Hence it is likely that items 2. and 3. were the main drivers.

The problem is, these jobs were equally well served by smartphones as a) better software became available for smartphones (e.g. Facebook moving from HTML5 to native) and b) smartphones got bigger.

Jobs where the current iPad is not yet a good fit

There are also a number of tasks where the iPad is not yet a good fit, more often than not due to the fact that the market itself has not yet been established.

  1. A field worker’s device: This is something that Ben Bajarin has noted in several articles. In the field, many workers still carry around paper documents and fill in paper forms. There is non-consumption of IT in these workflows. Tablets will inevitably be the instruments that bring IT to these areas, but it will have to be accompanied by customised software solutions designed for the task.
  2. Organised education: Although there is a lot of educational software for tablets which parents use to help develop their children’s skills, iPads are still just starting to be used in schools. I’m sure that the US is the leader in this area, but I’m sure there are still a large number of children who are not able to use personal iPads or other computer devices at school. The situation is even worse in other countries like Japan. The hurdle here is not in the tablets themselves, but in finding the best way to utilise tablets in teaching and training teachers to use them, and obtaining budget. There is also a lack of good teaching material for the teachers to use. This is an emerging market for which tablets are very well suited, but it requires much more than just tech. We have to wait for a lot of other infrastructure to catch up.
  3. Hardware as a service: Tablets can serve as the gateway for a service. For example, a cable TV company can include a tablet in your contract which you can use to view TV anywhere in your house, or save locally to view during your boring train commute. This has also been discussed many times, but the point is, this requires cable TV companies and/or other content distributors to get on board. This kind of negotiation will always take a long time to happen.
  4. A full replacement for PCs: In the long-term, it seems totally obvious to me that we will not be using PCs. Back in the 1990s, we were using computers that could not multitask efficiently and would crash many times during the day. In the 2010s, we are still using computers that can suddenly be infested with malware and have to protect by installing 3rd party software, and which degrade in performance over time requiring a fresh install. Although current operating systems have come a long way in addressing these issues, it is clear to me that a new approach to PC security and consistency is long overdue, and that the sandboxing approach taken by mobile OSes will eventually turn out to be the better path. Just like how we transitioned from cooperative multitasking systems without adequate memory management (Windows 95 and classic MacOS) towards full multitasking and memory protection (Windows XP and MacOS X), it seems inevitable that we will move towards fully sandboxed OSes for the vast majority of users. However, the capabilities of iOS are not yet sufficient to fully replace PCs. This will take time, but we have already seen Apple slowly address issues, first with iOS 8 extensions and now with many features in iOS 9. Given the current rate of improvement, by iOS 15 or so, it is totally reasonable to expect iOS to be able to fully replace PCs.
  5. New jobs: When you look at the impact that smartphones have had on our lives, one can clearly observe that it has hugely increased our consumption of computing. We browse the Internet in situations where it was previously unpractical. We all put our schedules into electronic devices. We share huge amounts of photos. Tech is not about device A replacing device B. Instead, it is about technology being used in new ways. It is about the situations where we couldn’t use tech, being converted to those where tech makes a significant contribution. In the same way, we should not try to find areas where tablets may replace current devices; we should try to find the remaining areas where people are not using technology. These are the areas where tablets can shine. There is no shortage of these areas, but we have to keep in mind that there is often a good reason why they have not been penetrated by tech. We have to keep in mind that in many cases, non-tech issues will have to be solved before tech can come in. A prime example of such out-of-the-box thinking is the recent collaboration between Japan Post, Apple and IBM to bring iPads to Japanese senior citizens.

What this complexity means

Because the tablet market is so complex and has many independent jobs-to-be-done, the sales data that we are seeing is simply an aggregate value that tells you very little about what is actually happening. The decline in tablet sales does not necessarily mean that the long-term prospects are dim because these data do not expose nascent growth segments. It is very likely that we initially saw rapid adoption due to jobs in the first category (jobs where the iPad was already a good fit), but this market levelled out as smartphones evolved. On the other hand, I expect the jobs in the second category (jobs where the iPad is not yet a good fit) are just getting started. However, jobs in the second category were not previously associated with IT and hence there is often little infrastructure in place and no budget allocated. This means that it will take time for the second category to gain significant traction. At the same time, it is hard to gauge the market size of the second category.

What we can expect is that in the mid- to long-term, jobs in the second category will definitely start to gain traction. Furthermore, as long as Apple keeps the faith, tablets will improve to the point where they can fully replace laptops in not only the common tasks, but in virtually all tasks. What we do not know yet is what the size of the tablet market will be at this point in the future.

iPad sales growth in Japan, 2015 Q2

In Apple’s 2Q 2015 earnings report (3Q for Apple), they mentioned that despite a global decrease of iPad sales, Japan saw an increase.

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This prompted a brief conversation on Twitter in which I Googled around to find any further information and hopefully an explanation.

Ben BajarinさんはTwitterを使っています kirkburgess benthompson naofumi any thoughts

Here, I would like to add a bit more detail to that Twitter conversation.

First the IDC Japan report:

  • 2015Q1 tablet shipments in Japan were +13.6% YoY (2.29M).
  • Shipments to the consumer segment were +1.9% YoY (1.41M).
  • Shipments to the business segments were +39.2% YoY (0.88M).
  • In the business segment, Android and Windows tablet demand drove the increase with an emphasis on the education sector.
  • Demand for Wi-Fi models in the consumer segment decreased. However shipments of iPad were good, mainly due to the 4G models.
  • The senior analyst at IDC Japan said that sales in the consumer segment is now mainly for replacements. On the other hand, in the business and education sector, solutions that incorporate tablets are expanding and they expect shipments to continue to increase. The collaboration between Apple/IBM and Japan Post is expected to expand the domestic tablet market.

I have a few additional comments.

First, we know that household tablet penetration in Japan is lower than many western countries. It was estimated to be 21.9% at the end of 2014 and maybe close to 30% at the end of 2015. This is in contrast to 51% in the US in February 2015.

Second, I’d like to outline what I’ve been noticing in the education sector. Unlike the US, I have heard very few reports of widespread deployments of tablets in schools where the aim is to have a tablet for every student. There may be a few private schools that are doing this, but it seems to still be in the experimental phases. What is more interesting is the prep-school market, which is huge in Japan. This market is estimated to be about 15 billion USD in size and interesting, it is apparently moving towards a blended learning style with on-demand video lessons. This is where tablets and PCs are being utilised on a one-to-one basis. I’m not absolutely sure if IDC would count devices purchased for this purpose as “household” or “business”, but I know that at least in some cases, the tablets are either included in the tuition or are provided as rentals, which would most likely classify them as “business”.

Third anecdotally, I’m seeing a lot of Microsoft Surface devices. Japan has always preferred small and portable PCs much more so than western countries (remember the Powerbook 2400c/240 which was a Japan exclusive?). This is probably due to the fact that we use public transport more often and we tend to have a lighter physique, hence increased baggage is a bigger issue.

Fourth, many Japanese businesses are still using feature phones and not smartphones. According to a report released in Jan 2015, only 22.4% of companies were deploying smartphones out of the 71.2% of companies which deploy a mobile phone (smartphone or feature phone). This suggests that if and when companies decide that their employees should have Internet access on the go, a combination of a feature phone and a tablet would be a more attractive solution rather than a large screen smartphone.

Android No Longer Competes With iOS

The Google I/O keynote on May 28th 2015, confirmed a thought that I have had for a long while.

On April 3rd 2013, I wrote a post (in Japanese) titled “Predicting Android’s Change Of Direction: Thoughts from Andy Rubin’s Demotion” (「Androidの方向転換予想：Andy Rubin氏の降格を受けて」). In that post, I argued the following;

  1. Andy Rubin considered Android to be very valuable in and of itself. For him, it was important to make Android the best that it could be. This meant being better than iOS.
  2. Larry Page is not very interested in Android itself. His interest is in Google’s cloud services, and Android is only one of many initiatives to maximise their user base.
  3. Hence Android’s market share itself is not important, nor is controlling Android an imperative. Even if iOS, Firefox OS or Tizen expanded their market share, that would not be a problem as long as they used Google’s services.
  4. Android does not need to be the best smartphone OS.

From this, I predicted that Android would stop trying to copy iOS in the attempt to get iOS users to switch. Instead, Android would probably focus on the low-end in order to expand the use of smartphones in markets where iOS would not have a strong presence.

The 2015 Google I/O keynote strongly suggests that this indeed has been their strategy ever since. The signals that I observed were;

  1. Android M itself (excluding the cloud services that would also be available on iOS), no longer adds major features that would give it an advantage over iOS.
  2. The announced Photo service is also available on iOS from day one. Now on Tap which is not feasible on iOS which is why there isn’t an iOS version.
  3. The improvements on offline connectivity are geared towards countries where Internet connectivity is unreliable or expensive compared to the average income.

Google itself mentioned that Android M is mainly about fixing bugs and annoyances in Lollipop, and if that is to be believed, then the next version of Android coming out in 2016 should have many more features. However, since I am now more confident of my reading of Google’s strategic imperatives, I am pretty sure that this will not be the case. I predict that the 2016 version of Android will also not have any major new features.

In short, I am now sure that Google no longer intends to compete with iOS with Android. Essentially, they are giving up the high-end smartphone market to Apple and they are cool with that. Instead, Google sees Android as a vehicle to spread their services to market segments that iOS cannot penetrate.

How will this strategy fare in the future?

This strategy is sound if Google’s sole objective is to learn about what people are doing. However, from a financial standpoint, there are many risks. By far the largest risk is, what if Apple is successful in distancing itself from Google? What if Apple somehow succeeds in significantly reducing the number of Google searches performed on iOS?

There are several dark shadows on the horizon in this regard.

  1. Google search may no longer be the default search engine on Safari. (link)
  2. The vast majority (75%) of mobile search ad revenue comes from iOS (from Goldman Sachs)
  3. Apple has been working to reduce iOS’s search reliance on Google, and the ability to display Wikipedia search results in Spotlight have reduced Google clicks(9to5mac).

It seems that either these reports are false, are insignificant, or simply that Google’s management is oblivious to these threats.

Either way, Google’s strategy makes it financially vulnerable due to an over dependence on iOS. Since Google still lacks a strong alternative revenue source to search ads, anything that causes it to lose this revenue will significantly slow the company’s growth. The only way to mitigate this risk would have been to attempt to capture the high-end smartphone market in collaboration with Samsung. This is very much to opposite of what Google’s actions suggest.

In conclusion

I am now quite sure that Google’s management gave up on the high-end smartphone market at the time when Andy Rubin was demoted on March, 2013. The past two years has seen Google focus on the low-end smartphone market, while deemphasising high-end features, and even fighting with the vendor that dominates high-end Android phones.

2015 is the year when we might see this strategy backfire. There are multiple reports that suggest that Apple will more aggressively distance itself from Google, and that this will have a significant impact on Google’s growth.

Importantly, by neglecting the high-end smartphone market, Google has burnt the bridges and has no backup strategy if this is indeed what happens.

iPad Installed Base

A lot of pundits are bemoaning over the flat sales of the iPad, declining sales of tablets overall, and the absence of radical improvements to the iPad lineup that would spark replacement sales.

Flat sales would be a large issue if it was caused by less users using and enjoying the product. It would however not be an issue if people were holding on to their old product longer, but still actively using and enjoying it. That is to say, what matters is not the number of units sold per quarter. What matters is how many people are using it.

One way to understand how many people are using iPads is to look at web usage data. Although web usage data is only a crude proxy, I believe that it can give us a good idea of the trends if we are take sufficient care. Here, I have taken web usage data from StatCounter.

USA
StatCounter os US monthly 201102 201409

United Kingdom
StatCounter os GB monthly 201102 201409

Europe
StatCounter os eu monthly 201102 201409

What we see is that iPad web usage (we are only looking at Desktop & Tablet devices so iOS is equal to iPad) has steadily risen since its introduction in 2011. In the USA data, we see usage stagnating in 2013. However this has recovered in 2014. We also do not see a similar slowdown in neither UK nor Europe data, so we don’t think that the USA stagnation is something to seriously contemplate.

This strongly suggests that despite a slowdown in sales since 2013, iPad usage has risen steadily since introduction. The longevity of old devices like the iPad2 has definitely contributed to this. In fact, the iPad 2 is still the most used iPad model.

Of course, this is not without its problems. If old devices stick around too long, it can slow down progress in the ecosystem since developers will have to support older and less capable devices. Although this is an issue that Apple definitely has to address, this is a totally different issue from the tablet category losing appeal.

So to summarize, despite a slowdown in sales, more and more people are actively using iPads and enjoying them. Although it would be ideal if sales were rising, it is more important for Apple to ensure that more and more people start using iPads and continue to love them. Apple seems to be doing this quite successfully. However, Apple will have an issue in the future with fragmentation because old devices will stay in use for longer.

Misguided Expectations for Replacements Cycles

Many people have blamed the slowdown of iPad sales on the fact that the replacement cycle of iPads is quite slow. In fact, we don’t really know what the replacement cycle is yet because the device is still very new (even the first replacement cycle hasn’t yet kicked in) and the second generation device, the iPad 2 (introduced March, 2011) is still used quite a lot.

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My question is, is the replacement cycle too long and should we be blaming Apple (as quite a few analysts are) for the lack of reasons to upgrade? Should we blame Apple for not introducing compelling improvements to the iPad that would drive users to buy new devices? Should we blame Apple for mismanaging the App Store to the effect that not enough exciting titles are being released for iPad?

This hinges on what the natural replacement cycle for a tablet device should look like. If the natural cycle should be something like two years, then yes we can blame Apple. If it is however something like 4 years, then we cannot conclude that Apple is doing a bad job.

Therefore, I think we should give some thought on to what the natural replacement cycle for a tablet device should actually look like.

Smartphones

The replacement cycle for the phone market varies from less than 2 years to over 10 years (interestingly, Android phones seem to have a much faster cycle).

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Recon Analytics sums up the reason for differences in replacement cycles as follows;

Based on the data and analysis outlined in the report, it is conclusive that over the last four years, handset subsidization is the dominant factor influencing the handset replacement cycle. The percentage of subscribers on postpaid and prepaid plans, as well as the relative income level in the countries, had a negligible impact on the handset replacement cycle.

Considering that the majority of iPads are WiFi-only and that these are not subsidized, we can expect iPad replacement cycles to be significantly longer that phones. There is very little reason to expect iPad replacements every two years.

PCs

The replacement cycle for business PCs in the US was a bit longer than 3 years. Why do they replace them so often?

  1. Increased productivity: If the old PC is much slower than the most recent models, then a new one would increase productivity.
  2. Escalating support costs: If the old PC tends to break down a lot, then buying a new computer may become cheaper than the maintenance costs.
  3. Software requirements: If the old PC cannot run new software, then it’s time to upgrade to a new PC.

Now how much of this would apply to tablets?

The amazing thing about the iPad, even the original model, is how fast it was on the limited hardware. Apple went to great lengths to achieve this, even sacrificing features that have been found on PCs since 2000 like multitasking in the background. Apple has kept third party software under strict restrictions, and this has helped keep software from bogging down the system. Apple itself has worked hard not to make iOS bloated.

As a result, the iPad 2 from 2011 still has enough performance to run the most recent iOS (iOS 8) with OK speed. Hence “increased productivity” does not apply very much to iPads and neither do “software requirements”. We also have to understand that iPads are mostly used by consumers, and so less emphasis is places on “increased productivity”.

Another amazing thing about the iPad is how durable it is. Without almost any moving parts, not even a keyboard, there is very little that can break. The build quality of the device was also superb from the onset. Also, unlike phones which you carry about you all day, you are much less likely to drop and shatter an iPad on concrete. Simply put, the cost of maintenance for an iPad is remarkable low.

Since none of the reasons for a 3 year PC replacement cycle apply to iPads, there is no justification for expecting similar cycles for iPads. It is very possible that the replacement cycle for an iPad is much longer than 3 years.

The one thing to note is that the iOS 8 is bearable on iPad 2, but stutters quite a bit. This is probably due to the fact that it only has 512 Mbytes of RAM and I think that it is unlikely that the next iOS version will support it. If so, then “software requirements” will demand a replacement next year.

Other consumer electronics devices

For most consumer electronics devices, we generally only replace them if they break down or our family gets larger (and we need a larger refrigerator or washing machine). Unless you buy them from a manufacturer that is seriously skimping on important components, they should last at least 5 years.

Summary

As we can see, the 2 year replacement cycle that many analysts were initially expecting for tablets was completely misguided, and hence we cannot blame Apple for a cycle that may be 3 years or longer.

We could even argue that having compelling new features is only rarely a reason why people ever upgrade their devices. This is for the most part irrelevant to the upgrade cycle. In fact, the main pain points cited for upgrading PCs are mitigated by stricter control of third-partly applications, better hardware build quality and simpler hardware design on iPads.